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The Hausman Test for Correlated Effects in Panel Data Models under Misspecification

The Hausman Test for Correlated Effects in Panel Data Models under Misspecification,Raymond O'Brien,Eleonora Patacchini

The Hausman Test for Correlated Effects in Panel Data Models under Misspecification  
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We investigate the performance under misspecification of the Durbin-Wu- Hausman test for correlated effects with panel data. Consideration of size leads to a general proposition for quadratic forms in normal variate which gives conditions for a class of test statistics, which are chi-square under correct specification, to be oversized under misspecification. In the case of measurement error, the Hausman test is found to be a test of the difference in asymptotic biases of between and within group estimators. However, its 'size' is sensitive to the relative magnitude of the intra-group and inter-group variations of the covariates, and can be so large as to call into question the use of the statistic in this case. We discuss an implementation of the alternative robust formulation of the test. Power considerations are presented, using a matched employee-employer data set
Published in 2006.
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