I am running a panel data and the Hausman test shows p-value = 0.0113, which means that FE model is better. What test is required to choose between the Fixed effect model and Pooled OLS? Pls kindly explain clearly the test and the steps or Stata command? Thank you very much.
https://www.statalist.org/forums/forum/general-stata-discussion/general/1554345-how-to-choose-between-fixed-effects-model-and-pooled-ols-model
Great answer Chuck A Arize. If you use R, the first test could also be to check the magnitude of the quasi-time demeaned unobserved individual heterogeneity (theta). If the theta approaches 0 (usually below 0.5), then the Pooled OLS is the model of choice because the time-invariant individual heterogeneity has no influence on the model parameters - you can report both RE and POLS. However, if the magnitude of theta approaches 1 (usually above 0.5), then the FE is the model of choice because the time-invariant individual heterogeneity is significantly influencing the estimation, and therefore must be eliminated - you could report RE and FE.
Run a RE and read the value of the theta, usually indicated above the model output. I hope this may be of some help.
The Hausman test is used to determine whether to use a fixed effects model or a pooled OLS model. The null hypothesis of the Hausman test is that the fixed effects model is appropriate, while the alternative hypothesis is that the pooled OLS model is appropriate. If the p-value of the Hausman test is less than the significance level, then you can reject the null hypothesis and conclude that the pooled OLS model is appropriate. If the p-value is greater than the significance level, then you cannot reject the null hypothesis and you should use the fixed effects model.
To perform the Hausman test in Stata, you can use the hausman command after estimating the fixed effects model and the pooled OLS model. For example:
* Estimate fixed effects model
xtreg y x1 x2, fe
* Estimate pooled OLS model
reg y x1 x2
* Perform Hausman test
hausman, test(fe)
This will perform the Hausman test and display the p-value and test statistic in the output. You can then decide whether to use the fixed effects model or the pooled OLS model based on the p-value.
I hope this helps! Let me know if you have any questions.
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