Hausman’s Specification Test for Panel Data: Practical Tips

Badi Baltagi

A chapter in Essays in Honor of Subal Kumbhakar, 2024, vol. 46, pp 13-24 from Emerald Group Publishing Limited

Abstract: This chapter revisits the Hausman (1978) test for panel data. It emphasizes that it is a general specification test and that rejection of the null signals misspecification and is not an endorsement of the fixed effects estimator as is done in practice. Non-rejection of the null provides support for the random effects estimator which is efficient under the null. The chapter offers practical tips on what to do in case the null is rejected including checking for endogeneity of the regressors, misspecified dynamics, and applying a nonparametric Hausman test, see Amini, Delgado, Henderson, and Parmeter (2012, chapter 16). Alternatively, for the fixed effects die hard, the chapter suggests testing the fixed effects restrictions before adopting this estimator. The chapter also recommends a pretest estimator that is based on an additional Hausman test based on the difference between the Hausman and Taylor estimator and the fixed effects estimator.

Keywords: Panel data; fixed and random effects; Hausman test; Mundlak regression; Hausman and Taylor estimator; misspecification; C33 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320240000046002

DOI: 10.1108/S0731-905320240000046002

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