IZA DP No. 3178: A Comment on Variance Decomposition and Nesting Effects in Two- and Three-Level Designs
Multilevel models are widely used in education and social science research. However, the effects of omitting levels of the hierarchy on the variance decomposition and the clustering effects have not been well documented. This paper discusses how omitting one level in three-level models affects the variance decomposition and clustering in the resulting two-level models. Specifically, I used the ANOVA framework and provided results for simple models that do not include predictors and assumed balanced nested data (or designs). The results are useful for teacher and school effects research as well as for power analysis during the designing stage of a study. The usefulness of the methods is demonstrated using data from Project STAR.