TY - JOUR
T1 - Pooling. An experimental study of alternative testing and estimation procedures in a two-way error component model
AU - Baltagi, Badi H.
N1 - Funding Information:
*The author acknowledges with appreciation the financial support received from the Research Initiation Grant Program at the University of Houston. I would like to thank Jay Ferry and Angela Hsu for their able research assistance, also Omar Ashur for his helpful programming assistance. The author would also like to thank an anonymous referee for his valuable comments and suggestions. Any errors remaining are solely my own.
PY - 1981/9
Y1 - 1981/9
N2 - This paper considers a two-way error component model with no lagged dependent variable and investigates the performance of various testing and estimation procedures applied to this model by means of Monte Carlo experiments. The following results were found: (1) The Chow-test performed poorly in testing the stability of cross-section regressions over time and in testing the stability of time-series regression across regions. (2) The Roy-Zellner test performed well and is recommended for testing the poolability of the data. (3) The Hausman specification test, employed to test the orthogonality assumption, gave a low frequency of Type I errors. (4) The Lagrange multiplier test, employed to test for zero variance components, did well except in cases where it was badly needed. (5) The problem of negative estimates of the variance components was found to be more serious in the two-way model than in the one-way model. However, replacing the negative variance estimates by zero did not have a serious effect on the performance of the second-round GLS estimates of the regression coefficients. (6) As in the one-way model, all the two-stage estimation methods performed reasonably well. (7) Better estimates of the variance components did not necessarily lead to better second-round GLS estimates of the regression coefficients.
AB - This paper considers a two-way error component model with no lagged dependent variable and investigates the performance of various testing and estimation procedures applied to this model by means of Monte Carlo experiments. The following results were found: (1) The Chow-test performed poorly in testing the stability of cross-section regressions over time and in testing the stability of time-series regression across regions. (2) The Roy-Zellner test performed well and is recommended for testing the poolability of the data. (3) The Hausman specification test, employed to test the orthogonality assumption, gave a low frequency of Type I errors. (4) The Lagrange multiplier test, employed to test for zero variance components, did well except in cases where it was badly needed. (5) The problem of negative estimates of the variance components was found to be more serious in the two-way model than in the one-way model. However, replacing the negative variance estimates by zero did not have a serious effect on the performance of the second-round GLS estimates of the regression coefficients. (6) As in the one-way model, all the two-stage estimation methods performed reasonably well. (7) Better estimates of the variance components did not necessarily lead to better second-round GLS estimates of the regression coefficients.
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U2 - 10.1016/0304-4076(81)90057-9
DO - 10.1016/0304-4076(81)90057-9
M3 - Article
AN - SCOPUS:0141532835
SN - 0304-4076
VL - 17
SP - 21
EP - 49
JO - Journal of Econometrics
JF - Journal of Econometrics
IS - 1
ER -