Test of Neglected Heterogeneity in Dyadic Models

Jinyong Hahn, Hyungsik Roger Moon () and Ruoyao Shi ()
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Hyungsik Roger Moon: USC & Yonsei
Ruoyao Shi: Department of Economics, University of California Riverside

No 202206, Working Papers from University of California at Riverside, Department of Economics

Abstract: We develop a Lagrange Multiplier (LM) test of neglected heterogeneity in dyadic models. The test statistic is derived by modifying Breusch and Pagan (1980)’s test. We establish the asymptotic distribution of the test statistic under the null using a novel martingale construction. We also consider the power of the LM test in generic panel models. Even though the test is motivated by random effects, we show that it has a power for detecting fixed effects as well. Finally, we examine how the estimation noise of the maximum likelihood estimator affects the asymptotic distribution of the test under the null, and show that such a noise may be ignored in large samples.

Keywords: Lagrange Multiplier test; dyadic regression model; error component panel regression model; fixed effects; local power (search for similar items in EconPapers)
JEL-codes: C12 C23 (search for similar items in EconPapers)
Pages: 77 Pages
Date: 2022-02
New Economics Papers: this item is included in nep-ecm, nep-net and nep-ore
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