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There is one problem that arises when using a fixed-effects model. Assume that you have a sample of observations for a large number of individuals over a period of years. If you use a fixed-effects model, you will not be able to find parameter estimates for any variable like race or sex that do not change over the time period of the sample. The reason for this limitation is that the time-constant variables are perfectly correlated with the dummy variables used for the fixed-effects. A similar problem arises if the fixed-effects are for years (rather than individuals). You cannot include a variable is constant for all individuals in any given year. Quite often the individual-constant (or time-constant) variable is not of interest and nothing is lost by not having the parameter estimate. On the other hand, the random-effects model does not have this problem because the estimation makes use of differences amongst the individuals to estimate a parameter for the individual-constant variable. Another way to think about this point is to remember that, unlike the fixed-effects model, the random-effects does not use dummy variables to summarized the unknown characteristics; thus, there is no problem with multicollinearity. We discuss in the next section an example in which this “problem” arises.

What would be nice is if there were a statistical test that allows us to decide if the random-effects model is the appropriate model? The Hausman test offers such a statistical test. The Hausman (specification) test exploits the fact that the parameters for the random-effects model should be not be statistically different from those found using a fixed-effects specification. If one observes a chi-squared value greater than the critical value you can conclude that the parameter estimates for the random-effects model are statistically different from the parameter estimates for a model using an assumption of fixed-effects, then you can conclude that the random-effects model is misspecified. Unfortunately, the misspecification could be due to the fact that the fixed-effects model is appropriate or it could be due to the unobserved error terms being correlated with the included explanatory variables. If the latter is the case, then one might consider augmenting the model with an appropriate measure of the part of the unobserved effect that is correlated with the error term. What we are describing is that same thing that happens when omitted variables are correlated with the error term—the parameter estimates are biased. We include an example of how to use Stata to perform the Housman specification test.

Estimation of panel data models in stata

General comments

There are three commands that matter in setting up the panel data. The first two commands precede the regression command because they establish which variable denotes the time period and which variable denotes the cross-sectional unit. These commands are:

.iis [variable name]

.tis [variable name]

The command for estimating the fixed-effects model is:

Questions & Answers

How we are making nano material?
what is a peer
What is meant by 'nano scale'?
What is STMs full form?
scanning tunneling microscope
what is Nano technology ?
Bob Reply
write examples of Nano molecule?
The nanotechnology is as new science, to scale nanometric
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
Is there any normative that regulates the use of silver nanoparticles?
Damian Reply
what king of growth are you checking .?
What fields keep nano created devices from performing or assimulating ? Magnetic fields ? Are do they assimilate ?
Stoney Reply
why we need to study biomolecules, molecular biology in nanotechnology?
Adin Reply
yes I'm doing my masters in nanotechnology, we are being studying all these domains as well..
what school?
biomolecules are e building blocks of every organics and inorganic materials.
anyone know any internet site where one can find nanotechnology papers?
Damian Reply
sciencedirect big data base
Introduction about quantum dots in nanotechnology
Praveena Reply
what does nano mean?
Anassong Reply
nano basically means 10^(-9). nanometer is a unit to measure length.
do you think it's worthwhile in the long term to study the effects and possibilities of nanotechnology on viral treatment?
Damian Reply
absolutely yes
how to know photocatalytic properties of tio2 nanoparticles...what to do now
Akash Reply
it is a goid question and i want to know the answer as well
characteristics of micro business
for teaching engĺish at school how nano technology help us
How can I make nanorobot?
Do somebody tell me a best nano engineering book for beginners?
s. Reply
there is no specific books for beginners but there is book called principle of nanotechnology
how can I make nanorobot?
what is fullerene does it is used to make bukky balls
Devang Reply
are you nano engineer ?
fullerene is a bucky ball aka Carbon 60 molecule. It was name by the architect Fuller. He design the geodesic dome. it resembles a soccer ball.
what is the actual application of fullerenes nowadays?
That is a great question Damian. best way to answer that question is to Google it. there are hundreds of applications for buck minister fullerenes, from medical to aerospace. you can also find plenty of research papers that will give you great detail on the potential applications of fullerenes.
what is the Synthesis, properties,and applications of carbon nano chemistry
Abhijith Reply
Mostly, they use nano carbon for electronics and for materials to be strengthened.
is Bucky paper clear?
carbon nanotubes has various application in fuel cells membrane, current research on cancer drug,and in electronics MEMS and NEMS etc
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Source:  OpenStax, Econometrics for honors students. OpenStax CNX. Jul 20, 2010 Download for free at http://cnx.org/content/col11208/1.2
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