While analyzing panel data, one has to estimate the aforementioned models and select the most appropriate one using Hausman Specification Test. What differentiates one from the other?
to my knowledge, a Hausman test will help you choose between FE and RE. But even if RE is rejected, you can use a correlated RE (Mundlak-Chamberlain devise). And there's no formal test to choose between FE and CRE. LSDV is fine, but unfeasible when cross section is large relative to time series.
Yes, you have to choose between both according to result of Hausman test. Random effect is preferred under H0. From technical point of view the fixed effect model apply dummy variable (1 and 0) to each cross section or to each period of the time. It depends on what kind of changes you want to analyse. Most often cross-section fixed effects are used. Thus, you applied dummy variable for each country or each region. On the other hand, random effect model is more sophisticated, but should be use only if the individual-specific effects are not correlated with the independent variables. Perhaps this could be usefull for you.
http://ftp.iza.org/dp5287.pdf
The pooled model does not make difference between period and cross section and it is mostly not appropriate for analysis. However, it is often useful to apply redundant fixed effect test and based on the results decide whether you have to use fixed-effect or pooled model.
I agree with Juan P. Sesmero. You can choose the appropriate model (FE or RE) through the Hausman test (1978). However, the GMM system (Anderson and Hsiao, 1981; Arellano and Bond, 1991; Blundell and Bond, 1998) is a more powerful econometric tool that captures the two components of endogeneity attributable to the unobservable heterogeneity and the simultaneity of the variables, respectively (Wintoki et al, 2012).
Both OLS and random effect will give similar results. the fixed effect controls individual effect but it can't estimate time-invariant variables. To choose between different model the result of a group of the test will guide. the attached paper will be helpful.
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