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Introductory Stata 60: Panel Data Hausman Test

Hi, I am Bob. Today let's continue the topic of panel data. After fitting the random effects and the fixed effects models, we need to choose an appropriate model. We know that the advantages of the random effects are that we can estimate the coefficients of the time-invariant explanatory variables, and the random effects estimator is more efficient than the fixed effects estimator because the standard error of the beta is smaller in random-effects models. However, the random-effects model has its disadvantages. If part of the error term is correlated with the explanatory variables, the random effects estimator is biased. By contrast, the fixed-effects model alleviates the endogeneity problem by using some transformations to eliminate the time-invariant component of the error term. In other words, the fixed effects model allows the correlation between the explanatory variables and the part of the error term that does not change over time, such as the characteristics and personalities of an individual or their family background. These unobserved factors usually affect both the outcome variables and the explanatory variables we are interested in. Under the circumstances, only the fixed effects lead to consistent estimates. But the consistency of the fixed effects method comes at a cost—the first differencing or the demeaning transformation method sacrifices some observations. It is generally less efficient. And most importantly, we could not include time-invariant explanatory variables in the model. We could not estimate the gender effect or education effect on the wages, given that gender and educational attainment did not change over time for each worker. The Hausman test helps us choose between random effects and fixed effects models. Let's continue to use the dataset for the US workers. You can download the dataset from the link below. https://drive.google.com/file/d/1LS79... #hausman #FixedEffects #RandomEffects ************************************* *60. Panel Data Hausman Test * ************************************* log using panel6.log, text replace set showbaselevels on *Open a panel dataset for US workers use "https://134997773-924437014403349320....", clear *Set panel data xtset ID year *Random effects method xtreg lwage i.union age schooling i.gender i.year, re estimates store RE *Fixed Effects method xtreg lwage i.union age schooling i.gender i.year, fe estimates store FE *Hausman test hausman FE RE log close