Solved – How to choose the best estimator? [Econometrics – panel data]

econometricsfixed-effects-modelpanel datarandom-effects-model

I'm quite new to econometrics and Stata. I'm trying to learn it by my own but I'm having some problems. Here's my problem: I have a balanced panel data and I need to choose the best estimator for my regression model.

I have regressed my panel data in Stata using five different estimators and I don't know which one is the best. I need to choose one between these five.

  • Pooled OLS estimator
  • Between estimator
  • Fixed Effects estimator
  • First-differences estimator
  • Random effects estimator

I also had calculated the Hausman test but it only tests the Fixed X Random Effects Model. The result of Hausman test was Prob>chi2 = 0.9699.

So I need to use the FE estimator. Is that? And about the others estimators?

Best Answer

Here are the steps that I use to estimate an panel data with Stata:
1, Peform an RE estimation with xtreg,re
2, Peform the Lagrange multiplier test for random effects with xttest0.The LM test helps you decide between a random effects regression and a simple OLS regression. The null hypothesis in the LM test is that variances across entities is zero. This is, no significant difference across units (i.e. no panel effect), and Pooled OLS is applied. If the null hypothesis is rejected, to step 3.
3, Perform an FE estimation with xtreg,fe, then perform an hausman test to compare with the RE estimation.
Differentiating POLS, FE, and RE is the first step to panel analysis for me.

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