Testing for IIA with the Hausman-McFadden Test
The Independence of Irrelevant Alternatives assumption inherent in multinomial logit models is most frequently tested with a Hausman-McFadden test. As is confirmed by many findings in the literature, this test sometimes produces negative outcomes, in contradiction of its asymptotic χ² distribution. This problem is caused by the use of an improper variance matrix and may lead to an invalid statistical inference even when the test value is positive. With a correct specification of the variance, the sampling distribution for small samples is indeed close to a χ² distribution.
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