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Simple Lm Tests For The Unbalanced Nested Error Component Regression Model


  • Badi Baltagi
  • Seuck Heun Song
  • Byoung Cheol Jung


This paper derives several Lagrange Multiplier tests for the unbalanced nested error component model. Economic data with a natural nested grouping include firms grouped by industry; or students grouped by schools. The LM tests derived include the joint test for both effects as well as the test for one effect conditional on the presence of the other. The paper also derives the standardized versions of these tests, their asymptotic locally mean most powerful version as well as their robust to local misspecification version. Monte Carlo experiments are conducted to study the performance of these LM tests.

Suggested Citation

  • Badi Baltagi & Seuck Heun Song & Byoung Cheol Jung, 2002. "Simple Lm Tests For The Unbalanced Nested Error Component Regression Model," Econometric Reviews, Taylor & Francis Journals, vol. 21(2), pages 167-187.
  • Handle: RePEc:taf:emetrv:v:21:y:2002:i:2:p:167-187 DOI: 10.1081/ETC-120014347

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    References listed on IDEAS

    1. Maxwell King & Ping Wu, 1997. "Locally optimal one-sided tests for multiparameter hypotheses," Econometric Reviews, Taylor & Francis Journals, vol. 16(2), pages 131-156.
    2. Yuzo Honda, 1985. "Testing the Error Components Model with Non-Normal Disturbances," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 681-690.
    3. Alicia H. Munnell, 1990. "Why has productivity growth declined? Productivity and public investment," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-22.
    4. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
    5. H. Baltagi, Badi & Heun Song, Seuck & Cheol Jung, Byoung, 2001. "The unbalanced nested error component regression model," Journal of Econometrics, Elsevier, vol. 101(2), pages 357-381, April.
    6. Baltagi, Badi H. & Chang, Young-Jae & Li, Qi, 1992. "Monte Carlo results on several new and existing tests for the error component model," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 95-120.
    7. Nerlove, Marc, 1971. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross Sections," Econometrica, Econometric Society, vol. 39(2), pages 359-382, March.
    8. Montmarquette, Claude & Mahseredjian, Sophie, 1989. "Does School Matter for Educational Achievement? A Two-Way Nested-Error Components Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 181-193, April-Jun.
    9. Rahman, Shahidur & King, Maxwell L., 1997. "Marginal-likelihood score-based tests of regression disturbances in the presence of nuisance parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 81-106.
    10. Bera, Anil K. & Yoon, Mann J., 1993. "Specification Testing with Locally Misspecified Alternatives," Econometric Theory, Cambridge University Press, vol. 9(04), pages 649-658, August.
    11. repec:cup:etheor:v:9:y:1993:i:4:p:649-58 is not listed on IDEAS
    12. Hadri, Kaddour & Phillips, Garry D. A., 1999. "The accuracy of the higher order bias approximation for the 2SLS estimator," Economics Letters, Elsevier, vol. 62(2), pages 167-174, February.
    13. Breusch, Trevor S., 1980. "Useful invariance results for generalized regression models," Journal of Econometrics, Elsevier, vol. 13(3), pages 327-340, August.
    14. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
    15. repec:exe:wpaper:99/06 is not listed on IDEAS
    16. Moulton, Brent R & Randolph, William C, 1989. "Alternative Tests of the Error Components Model," Econometrica, Econometric Society, vol. 57(3), pages 685-693, May.
    17. Baltagi, Badi H & Pinnoi, Nat, 1995. "Public Capital Stock and State Productivity Growth: Further Evidence from an Error Components Model," Empirical Economics, Springer, vol. 20(2), pages 351-359.
    18. Antweiler, Werner, 2001. "Nested random effects estimation in unbalanced panel data," Journal of Econometrics, Elsevier, vol. 101(2), pages 295-313, April.
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    Cited by:

    1. Badi H. BALTAGI & Bernard FINGLETON & Alain PIROTTE, 2014. "Multilevel And Spillover Effects Estimated For Spatial Panel Data, With Application To English House Prices," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 40, pages 25-36.
    2. Badi H. Baltagi & Georges Bresson & Jean‐Michel Etienne, 2015. "Hedonic Housing Prices in Paris: An Unbalanced Spatial Lag Pseudo‐Panel Model with Nested Random Effects," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(3), pages 509-528, April.
    3. Badi Baltagi & Seuck Song, 2006. "Unbalanced panel data: A survey," Statistical Papers, Springer, vol. 47(4), pages 493-523, October.
    4. Jhun, Myoungshic & Song, Seuck Heun & Jung, Byoung Cheol, 2003. "BLUP in the nested panel regression model with serially correlated errors," Computational Statistics & Data Analysis, Elsevier, vol. 44(1-2), pages 77-88, October.
    5. Baltagi, Badi H. & Fingleton, Bernard & Pirotte, Alain, 2014. "Spatial lag models with nested random effects: An instrumental variable procedure with an application to English house prices," Journal of Urban Economics, Elsevier, vol. 80(C), pages 76-86.
    6. He, Ming & Lin, Kuan-Pin, 2015. "Testing spatial effects and random effects in a nested panel data model," Economics Letters, Elsevier, vol. 135(C), pages 85-91.


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