CPR Working Paper Series No. 115
Testing the Fixed Effects Restrictions?
A Monte Carlo Study Of
Chamberlain’s Minimum
Chi-Squared Test
Badi H. Baltagi, Georges Bresson, Alain Pirotte
March 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).
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