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Testing the fixed effects restrictions? A Monte Carlo study of Chamberlain’s Minimum Chi-Squared test

  • BALTAGI H-B
  • BRESSON G.
  • PIROTTE A.

Chamberlain (1982) showed that the fixed effects (FE) specification imposes testable restrictions on the coefficients from regressions of all leads and lags of dependent variableson all leads and lags of independent variables. Angrist and Newey (1991) suggested computing this test statistic as the degrees of freedom times the R2 from a regression of within residuals on all leads and lags of the exogenous variables. Despite the simplicity of these tests, they are not commonly used in practice. Instead, a Hausman (1978) test is used based on a contrast of the fixed and random effects specifications. We advocate the use of the Chamberlain (1982) test if the researcher wants to settle on the FE specifications, we check this test's performance using Monte Carlo experiments, and we apply it to the crime example of Cornwell and Trumbull (1994).

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Paper provided by ERMES, University Paris 2 in its series Working Papers ERMES with number 0703.

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Date of creation: 2007
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Handle: RePEc:erm:papers:0703
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  1. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  2. Cornwell, Christopher & Trumbull, William N, 1994. "Estimating the Economic Model of Crime with Panel Data," The Review of Economics and Statistics, MIT Press, vol. 76(2), pages 360-66, May.
  3. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May.
  4. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
  5. Owusu-Gyapong, Anthony, 1986. "Alternative Estimating Techniques for Panel Data on Strike Activity," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 526-31, August.
  6. Angrist, Joshua D & Newey, Whitney K, 1991. "Over-Identification Tests in Earnings Functions with Fixed Effects," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(3), pages 317-23, July.
  7. Cardellichio, Peter A, 1990. "Estimation of Production Behavior Using Pooled Microdata," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 11-18, February.
  8. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
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