# st: re: fixed effects estimation with time invariant variables

 From Kit Baum <[email protected]> To [email protected] Subject st: re: fixed effects estimation with time invariant variables Date Wed, 27 Jul 2005 09:34:41 -0400

Alice said

I reporduce
a Hausman test (fixed vs. random effect) result. How do I interpret this
result?

hausman fixed random

---- Coefficients ----
| (b) (B) (b-B)
sqrt(diag(V_b-V_B))
| fixed random Difference S.E.
------------- +----------------------------------------------------------------
beta | .0227671 .0407022 -.0179352 .023357
------------------------------------------------------------------------ ------
b = consistent under Ho and Ha; obtained from
xtreg
B = inconsistent under Ha, efficient under Ho; obtained from
xtreg

Test: Ho: difference in coefficients not systematic

chi2(1) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 0.59
Prob>chi2 = 0.4426

In this case the common coefficient, beta, does not differ significantly between FE and RE. The Hausman test is based on the notion that the norm of the vector of differences between the common coefficients is small. In a single-coefficient case, that merely refers to the single difference -0.0179. That number is very large relative to FE or RE point estimates, but its standard error is even larger. You thus do not reject Ho: orthogonality of X and u, RE is the more efficient estimator since your Chi-square is not large enough.

Kit Baum, Boston College Economics
http://ideas.repec.org/e/pba1.html

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