Past exam of the mathematics course of the University of Cambridge / 2013 / iii / Paper 30 / 5 / a / ii

Unobserved heterogeneity is persistent variation between subjects arising from unmeasured characteristics. A subject-specific latent variable or random intercept can represent it. Subjects with high latent success propensities tend to succeed repeatedly, so their observed outcomes can have positive serial correlation even when outcomes are conditionally independent given that propensity. Apparent persistence therefore need not imply true state dependence.