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Hausman’s Specification Test for Panel Data: Practical Tips

In: Essays in Honor of Subal Kumbhakar

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  • Badi H. Baltagi

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.

Suggested Citation

  • Badi H. Baltagi, 2024. "Hausman’s Specification Test for Panel Data: Practical Tips," Advances in Econometrics, in: Essays in Honor of Subal Kumbhakar, volume 46, pages 13-24, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320240000046002
    DOI: 10.1108/S0731-905320240000046002
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    More about this item

    Keywords

    Panel data; fixed and random effects; Hausman test; Mundlak regression; Hausman and Taylor estimator; misspecification; C33;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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