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Testing for Time-Invariant Unobserved Heterogeneity in Generalized Linear Models for Panel Data

  • Francesco Bartolucci

    (University of Perugia)

  • Federico Belotti

    (University of Rome "Tor Vergata")

  • Franco Peracchi

    (University of Rome "Tor Vergata" and EIEF)

Recent literature on panel data has emphasized the importance of accounting for time-varying unobserved heterogeneity, which may stem either from time-varying omitted variables or macro-level shocks that affect each individual unit differently. In this paper, we propose a computationally convenient test for the null hypothesis of time-invariant individual effects. The proposed test is an application of Hausman (1978) specification test procedure and can be applied to generalized linear models for panel data, a wide class of models that includes the Gaussian linear model and a variety of nonlinear models typically employed for discrete or categorical outcomes. The basic idea is to compare fixed effects estimators defined as the maximand of full and pairwise conditional likelihood functions. Thus, the proposed approach requires no assumptions on the distribution of the individual effects and, most importantly, it does not require them to be independent of the covariates in the model. We investigate the finite sample properties of the test through a set of Monte Carlo experiments. Our results show that the test performs quite well, with small size distortions and good power properties. A health economics example based on data from the Health and Retirement Study is used to illustrate the proposed test.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1312.

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Length: 32 pages
Date of creation: 2013
Date of revision: May 2013
Handle: RePEc:eie:wpaper:1312
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