Testing FE Vs. RE
We can test whether a fixed or random effects model is appropriate using a Hausman test.
- :
- :
If is true, both and are consistent, but only is efficient. If is true, is consistent and is not.
- where
The Hausman test is a specification test so a large test statistic might be indication that there might be Errors in Variables (EIV) or our model is misspecified. If the FE assumption is true, we should find that .
A simple heuristic is that if there could be EIV.
Read more about this topic: Fixed Effects Model
Famous quotes containing the word testing:
“Traditional scientific method has always been at the very best 20-20 hindsight. Its good for seeing where youve been. Its good for testing the truth of what you think you know, but it cant tell you where you ought to go.”
—Robert M. Pirsig (b. 1928)