Abstract #300116

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JSM 2003 Abstract #300116
Activity Number: 314
Type: Invited
Date/Time: Wednesday, August 6, 2003 : 8:30 AM to 10:20 AM
Sponsor: Business & Economics Statistics Section
Abstract - #300116
Title: Fixed Effects, Random Effects, or Hausman-Taylor? A Pretest Estimator
Author(s): Badi H. Baltagi*+ and Georges Bresson
Companies: Texas A&M University and Ermes Universite Paris 2
Address: Dept. of Economics, College Station, TX, 77843-4228,
Keywords: Panel data ; fixed effects ; random effects ; simulations ; pretest estimator ; Hausman-Taylor
Abstract:

The choice between fixed effects (FE) and random effects (RE) estimators continues to generate a hot debate among econometricians. Mundlak (1978) argues that the RE model assumes exogeneity of all the regressors and the random individual effects. In contrast, the FE model allows for endogeneity of all the regressors and the individual effects. This all or nothing choice of correlation between the individual effects and the regressors prompted Hausman and Taylor (1981) to propose a model where some of the regressors are correlated with the individual effects. The choice of the strictly exogenous regressors is a testable hypothesis. In fact, this is a Hausman test based upon the contrast between the FE and the HT estimators. This paper suggests a pretest estimator based upon two Hausman tests as an alternative to the FE or RE estimators for panel data models. The bias and RMSE properties of these estimators are investigated using Monte Carlo experiments.

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