Testing the Fixed Effects Restrictions? A Monte Carlo Study of Chamberlain’s Minimum Chi-Squared Test

Center for Policy Research Working Paper No. 115

12 Pages Posted: 13 Apr 2011

See all articles by Badi H. Baltagi

Badi H. Baltagi

Syracuse University - Maxwell School of Citizenship and Public Affairs; IZA Institute of Labor Economics; Syracuse University - Center for Policy Research

Georges Bresson

ERMES (CNRS), Université Panthéon-Assas Paris II

Alain Pirotte

ERMES (CNRS), Université Panthéon-Assas Paris II; INRETS-DEST

Date Written: March 1, 2009

Abstract

Chamberlain (1982) showed that the fixed effects (FE) specification imposes testable restrictions on the coefficients from regressions of all leads and lags of dependent variables on 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 Chamberlain (1982) test if the researcher wants to settle on the FE specification and we check this test’s performance using Monte Carlo experiments and we apply it to the crime example of Cornwell and Trumbull (1994).

Keywords: Panel data, Fixed effects (FE), Random effects (RE), Chamberlain test, Minimum chi-squared (MCS), Angrist-Newey test

JEL Classification: C23

Suggested Citation

Baltagi, Badi H. and Bresson, Georges and Pirotte, Alain, Testing the Fixed Effects Restrictions? A Monte Carlo Study of Chamberlain’s Minimum Chi-Squared Test (March 1, 2009). Center for Policy Research Working Paper No. 115, Available at SSRN: https://ssrn.com/abstract=1807270 or http://dx.doi.org/10.2139/ssrn.1807270

Badi H. Baltagi (Contact Author)

Syracuse University - Maxwell School of Citizenship and Public Affairs ( email )

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IZA Institute of Labor Economics

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Syracuse University - Center for Policy Research ( email )

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Georges Bresson

ERMES (CNRS), Université Panthéon-Assas Paris II ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

Alain Pirotte

ERMES (CNRS), Université Panthéon-Assas Paris II ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

INRETS-DEST

23 rue Alfred Nobel
Champs sur Marne, 77420
France

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