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Test of Neglected Heterogeneity in Dyadic Models

Author

Listed:
  • Jinyong Hahn

    (UCLA)

  • Hyungsik Roger Moon

    (USC & Yonsei)

  • Ruoyao Shi

    (Department of Economics, University of California Riverside)

Abstract

We develop a Lagrange Multiplier (LM) test of neglected heterogeneity in dyadic models. The test statistic is derived by modifying Breusch and Pagan (1980)’s test. We establish the asymptotic distribution of the test statistic under the null using a novel martingale construction. We also consider the power of the LM test in generic panel models. Even though the test is motivated by random effects, we show that it has a power for detecting fixed effects as well. Finally, we examine how the estimation noise of the maximum likelihood estimator affects the asymptotic distribution of the test under the null, and show that such a noise may be ignored in large samples.

Suggested Citation

  • Jinyong Hahn & Hyungsik Roger Moon & Ruoyao Shi, 2022. "Test of Neglected Heterogeneity in Dyadic Models," Working Papers 202206, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202206
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    File URL: https://economics.ucr.edu/repec/ucr/wpaper/202206.pdf
    File Function: First version, 2022
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    More about this item

    Keywords

    Lagrange Multiplier test; dyadic regression model; error component panel regression model; fixed effects; local power;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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