Abstract
Unobservable individual effects in panel data models are employed to control for heterogeneity. These can be thought of as random variables that are uncorrelated with the regressors, thus generating a random effects model. Alternatively, these random individual effects are allowed to be completely correlated with the regressors, thus generating a fixed effects model. The choice between these two alternatives is usually settled using a Hausman (Econometrica 46:1251–1271, 1978) test. This article argues that one should interpret a rejection by the Hausman test as a rejection of the random effects model, not necessarily an endorsement of the fixed effects model.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Bibliography
Angrist, J.D., and W.K. Newey. 1991. Over-identification tests in earnings functions with fixed effects. Journal of Business and Economic Statistics 9: 317–323.
Arellano, M. 1987. Computing robust standard errors for within-groups estimators. Oxford Bulletin of Economics and Statistics 49: 431–434.
Arellano, M. 1993. On the testing of correlated effects with panel data. Journal of Econometrics 59: 87–97.
Balestra, P., and M. Nerlove. 1966. Pooling cross-section and time-series data in the estimation of a dynamic model: The demand for natural gas. Econometrica 34: 585–612.
Baltagi, B.H. 2005. Econometric analysis of panel data. Chichester: Wiley.
Chamberlain, G. 1984. Panel data. In Handbook of econometrics, ed. Z. Griliches and M. Intriligator. Amsterdam: North-Holland.
Fuller, W.A., and G.E. Battese. 1974. Estimation of linear models with cross-error structure. Journal of Econometrics 2: 67–78.
Haavelmo, T. 1944. The probability approach in econometrics. Econometrica 12(Supplement): 1–118.
Hausman, J.A. 1978. Specification tests in econometrics. Econometrica 46: 1251–1271.
Hausman, J.A., and W.E. Taylor. 1981. Panel data and unobservable individual effects. Econometrica 49: 1377–1398.
Knight, F.H. 1921. Risk, uncertainty and profit. Boston: Houghton Mifflin.
Lancaster, T. 2000. The incidental parameter problem since 1948. Journal of Econometrics 95: 391–413.
Mundlak, Y. 1961. Empirical production function free of management bias. Journal of Farm Economics 43: 44–56.
Mundlak, Y. 1978. On the pooling of time series and cross-section data. Econometrica 46: 69–85.
Nerlove, M., and P. Balestra. 1992. Formulation and estimation of econometric models for panel data. In The econometrics of panel data: Handbook of theory and applications, ed. L. Matyas and P. Sevestre. Dordrecht: Kluwer.
Neyman, J., and E.L. Scott. 1948. Consistent estimation from partially consistent observations. Econometrica 16: 1–32.
Swamy, P.A.V.B., and S.S. Arora. 1972. The exact finite sample properties of the estimators of coefficients in the error components regression models. Econometrica 40: 261–275.
Wallace, T.D., and A. Hussain. 1969. The use of error components models in combining cross-section and time-series data. Econometrica 37: 55–72.
Author information
Authors and Affiliations
Editor information
Copyright information
© 2018 Macmillan Publishers Ltd.
About this entry
Cite this entry
Baltagi, B.H. (2018). Fixed Effects and Random Effects. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2713
Download citation
DOI: https://doi.org/10.1057/978-1-349-95189-5_2713
Published:
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-95188-8
Online ISBN: 978-1-349-95189-5
eBook Packages: Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences