Using a mixed effects model vs. just adding dummies for every subject? I'm a little fuzzy on the exact assumptions needed for mixed/fixed effects models. As an example, let's say we're trying to model the effect of age on a person's 5k time, and we have a dataset of race times by person, by year (so multiple observations per person at different ages).
From what I remember, the naive OLS way would be to regress race time on age. We don't want to do this because there are multiple observations per person, which violates the OLS assumption of independent observations. We can introduce a random effect for person to the model, which "allows" for each person to have their own intercept and lets us see the within-subject effect of age on race time. I believe this is a pretty standard way to deal with multiple observations per subject.
However, what's the difference between:

*

*Using a mixed-effects model as specified, and

*Using a fixed-effects model but using dummy variables for each person? In essence, why can't we just regress race time on age + Person A + Person B + ..., where Person [x] is a dummy for a particular person in the data? Isn't this also effectively allowing each person to have their own intercept?


The difference is, that in the random-effects model, you will have a shrinkage effect: While in the fixed-effects model you get offsets that give the best fit for each person, independent of the offsets of the others, the random-effects model also tries to make those offsets similar. The idea is that the offset of one person is somehow an indicator for the offset of another person to be similar. Because, they are both, after all, "persons". This especially helps e.g. if you have persons with lots of data, where you are quite sure about the fitted offsets, and other persons with only very little data which leads to large uncertainty about the offsets. In this case, the requirement that the offsets of all the persons are similar will draw them together ("shrinking" them together), and draw the uncertain offsets towards the certain offsets.
