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Testing the Exogeneity Assumption in Panel Data Models with "Non Classical" Disturbances

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O'Brien, R.
Patacchini, E.

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Abstract

This paper is concerned with the use of the Durbin-Wu-Hausman test for correlated effects with panel data. The assumptions underlying the construction of the statistic are too strong in many empirical cases. The consequences of deviations from the basic assumptions are investigated. The size distortion is assessed. In the case of measurement error, the Hausman test is found to be a test of the difference in asymptotic biases of between and within group estimators. However, its `size' is sensitive to the relative magnitude of the intra-group and inter-group variations of the covariates, and can be so large as to preclude the use of the statistic in this case. We show to what extent some assumptions can be relaxed in a panel data context and we discuss an alternative robust formulation of the test. Power considerations are presented.

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0302.

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Date of creation: 01 Feb 2003
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Handle: RePEc:stn:sotoec:0302

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  1. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July. [Downloadable!] (restricted)
  2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  3. Baltagi, Badi H., 1996. "Testing for random individual and time effects using a Gauss-Newton regression," Economics Letters, Elsevier, vol. 50(2), pages 189-192, February. [Downloadable!] (restricted)
  4. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May. [Downloadable!] (restricted)
  5. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November. [Downloadable!] (restricted)
  6. Maddala, G S, 1971. "The Use of Variance Components Models in Pooling Cross Section and Time Series Data," Econometrica, Econometric Society, vol. 39(2), pages 341-58, March.
  7. Nerlove, Marc, 1971. "A Note on Error Components Models," Econometrica, Econometric Society, vol. 39(2), pages 383-96, March. [Downloadable!] (restricted)
  8. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September. [Downloadable!] (restricted)
  9. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March. [Downloadable!] (restricted)
  10. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
  11. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February. [Downloadable!] (restricted)
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  12. Holly, Alberto, 1982. "A Remark on Hausman's Specification Test," Econometrica, Econometric Society, vol. 50(3), pages 749-59, May. [Downloadable!] (restricted)
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