The impact of a Hausman pretest on the size of a hypothesis test: The panel data case

Patrik Guggenberger

doi:10.1016/j.jeconom.2009.11.003

The impact of a Hausman pretest on the size of a hypothesis test: The panel data case

Patrik Guggenberger

Economics

Research output: Contribution to journal › Article › peer-review

59 Scopus citations

Abstract

The size properties of a two-stage test in a panel data model are investigated where in the first stage a Hausman (1978) specification test is used as a pretest of the random effects specification and in the second stage, a simple hypothesis about a component of the parameter vector is tested, using a t-statistic that is based on either the random effects or the fixed effects estimator depending on the outcome of the Hausman pretest. It is shown that the asymptotic size of the two-stage test equals 1 for empirically relevant specifications of the parameter space. The size distortion is caused mainly by the poor power properties of the pretest. Given these results, we recommend using a t-statistic based on the fixed effects estimator instead of the two-stage procedure.

Original language	English (US)
Pages (from-to)	337-343
Number of pages	7
Journal	Journal of Econometrics
Volume	156
Issue number	2
DOIs	https://doi.org/10.1016/j.jeconom.2009.11.003
State	Published - Jun 2010

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1016/j.jeconom.2009.11.003

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title = "The impact of a Hausman pretest on the size of a hypothesis test: The panel data case",

abstract = "The size properties of a two-stage test in a panel data model are investigated where in the first stage a Hausman (1978) specification test is used as a pretest of the random effects specification and in the second stage, a simple hypothesis about a component of the parameter vector is tested, using a t-statistic that is based on either the random effects or the fixed effects estimator depending on the outcome of the Hausman pretest. It is shown that the asymptotic size of the two-stage test equals 1 for empirically relevant specifications of the parameter space. The size distortion is caused mainly by the poor power properties of the pretest. Given these results, we recommend using a t-statistic based on the fixed effects estimator instead of the two-stage procedure.",

author = "Patrik Guggenberger",

note = "Funding Information: The author would like to thank a co-editor, an associate editor, two referees, Iv{\'a}n Fern{\'a}ndez-Val, Yixiao Sun, and Jeffrey Wooldridge for excellent comments, the NSF for support under grant number SES-0748922, the Alfred P. Sloan Foundation for a 2009 fellowship, and seminar and conference participants at various places. ",

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N1 - Funding Information: The author would like to thank a co-editor, an associate editor, two referees, Iván Fernández-Val, Yixiao Sun, and Jeffrey Wooldridge for excellent comments, the NSF for support under grant number SES-0748922, the Alfred P. Sloan Foundation for a 2009 fellowship, and seminar and conference participants at various places.

PY - 2010/6

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N2 - The size properties of a two-stage test in a panel data model are investigated where in the first stage a Hausman (1978) specification test is used as a pretest of the random effects specification and in the second stage, a simple hypothesis about a component of the parameter vector is tested, using a t-statistic that is based on either the random effects or the fixed effects estimator depending on the outcome of the Hausman pretest. It is shown that the asymptotic size of the two-stage test equals 1 for empirically relevant specifications of the parameter space. The size distortion is caused mainly by the poor power properties of the pretest. Given these results, we recommend using a t-statistic based on the fixed effects estimator instead of the two-stage procedure.

AB - The size properties of a two-stage test in a panel data model are investigated where in the first stage a Hausman (1978) specification test is used as a pretest of the random effects specification and in the second stage, a simple hypothesis about a component of the parameter vector is tested, using a t-statistic that is based on either the random effects or the fixed effects estimator depending on the outcome of the Hausman pretest. It is shown that the asymptotic size of the two-stage test equals 1 for empirically relevant specifications of the parameter space. The size distortion is caused mainly by the poor power properties of the pretest. Given these results, we recommend using a t-statistic based on the fixed effects estimator instead of the two-stage procedure.

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JO - Journal of Econometrics

JF - Journal of Econometrics

IS - 2

ER -

The impact of a Hausman pretest on the size of a hypothesis test: The panel data case

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