Advertisement

Empirical Economics

, Volume 47, Issue 4, pp 1365–1387 | Cite as

Robust tests for time-invariant individual heterogeneity versus dynamic state dependence

  • Federico Zincenko
  • Walter Sosa-Escudero
  • Gabriel Montes-RojasEmail author
Article

Abstract

We derive tests for persistent effects in a general linear dynamic panel data context. Two sources of persistent behavior are considered: time-invariant unobserved factors (captured by an individual random effect) and dynamic persistence or “state dependence” (captured by autoregressive behavior). We will use a maximum likelihood framework to derive a family of tests that help researchers learn whether persistence is due to individual heterogeneity, dynamic effect, or both. The proposed tests have power only in the direction they are designed to perform, that is, they are locally robust to the presence of alternative sources of persistence, and consequently, are able to identify which source of persistence is active. A Monte Carlo experiment is implemented to explore the finite sample performance of the proposed procedures. The tests are applied to a panel data series of real GDP growth for the period 1960–2005.

Keywords

Dynamic panel Local misspecification Random effects Testing 

JEL Classification

C12 C23 

Notes

Acknowledgments

The authors thank the Editor, the Associate Editor and two anonymous referees for comments and suggestions. The authors also thank Hildegart Ahumada and Enrique Kawamura for useful comments to previous versions of this paper. Previous versions of this paper were presented at 2007 LAMES meeting (Bogota, Colombia) and 2007 AAEP meeting (Bahia Blanca, Argentina). This paper was completed while Zincenko was a PhD student at UCLA. All errors are our responsibility.

References

  1. Anderson TW, Hsiao C (1982) Formulation and estimation of dynamic models using panel data. J Econom 18:47–82CrossRefGoogle Scholar
  2. Angrist JD, Pischke JS (2009) Mostly harmless econometrics. An empiricist’s companion. Princeton University Press, PrincetonGoogle Scholar
  3. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297CrossRefGoogle Scholar
  4. Azariadis C, Drazen A (1990) Threshold externalities in economic development. Q J Econ 105:501–526CrossRefGoogle Scholar
  5. Baltagi BH, Li Q (1991) A joint test for serial correlation and random individual effects. Stat Probab Lett 11:277–280CrossRefGoogle Scholar
  6. Baltagi BH, Li Q (1995) Testing for AR(1) against MA(1) disturbances in and error component model. J Econom 68:133–151CrossRefGoogle Scholar
  7. Baltagi B, Chang Y, Li Q (1992) Monte Carlo results on several new and existing tests for the error component model. J Econom 54:95–120CrossRefGoogle Scholar
  8. Baumol W (1986) Productivity growth, convergence, and welfare: what the long-run data show. Am Econ Rev 76:1072–1085Google Scholar
  9. Bera A, Montes-Rojas G, Sosa-Escudero W (2009) Testing under local misspecification and artificial regressions. Econ Lett 104:66–68CrossRefGoogle Scholar
  10. Bera A, Montes-Rojas G, Sosa-Escudero W (2010) General specification testing with locally misspecified models. Econom Theory 26:1838–1845CrossRefGoogle Scholar
  11. Bera AK, Yoon M (1993) Specification testing with locally misspecified alternatives. Econom Theory 9:649–658CrossRefGoogle Scholar
  12. Bera AK, Sosa-Escudero W, Yoon M (2001) Test for the error component model in the presence of local misspecification. J Econom 101:1–23CrossRefGoogle Scholar
  13. Bhargava A, Sargan JD (1983) Estimating dynamic random effects models from panel data covering short time periods. Econometrica 51:1635–1659CrossRefGoogle Scholar
  14. Bond S (2002) Dynamic panel data models: a guide to micro data methods and practice. CENMMAP working paper CWP09/02Google Scholar
  15. Breusch TS, Pagan AR (1980) The lagrange multiplier test and its application to model specification in econometrics. Rev Econ Stud 47:239–253CrossRefGoogle Scholar
  16. Davidson J, MacKinnon J (1987) Implicit alternatives and the local power of test statistics. Econometrica 55:1305–1329CrossRefGoogle Scholar
  17. DeLong JB (1988) Productivity growth, convergence, and welfare: comment. Am Econ Rev 78:1138–1154Google Scholar
  18. Graham B, Temple J (2006) Rich nations poor nations: how much can multiple equilibria explain? J Econ Growth 11:5–41CrossRefGoogle Scholar
  19. Hendry DF (1995) Dynaminc econometrics. Oxford University Press, New YorkCrossRefGoogle Scholar
  20. Hendry DF, Mizon GE (1978) Serial correlation as a convenient simplification, not a nuisance: a comment on a study of the demand for money by the Bank of England. Econ J 88:549–563CrossRefGoogle Scholar
  21. Holtz-Eakin D (1988) Testing for individual effects in autorregresive models. J Econom 39:297–307CrossRefGoogle Scholar
  22. Hsiao C (2003) Analysis of panel data. Cambridge University Press, New YorkCrossRefGoogle Scholar
  23. Judson RA, Owen AL (1999) Estimating dynamic panel data models: a guide for macroeconomists. Econ Lett 65:9–15CrossRefGoogle Scholar
  24. Lillard LA, Willis RJ (1978) Dynamic aspects of earning mobility. Econometrica 46:985–1012CrossRefGoogle Scholar
  25. Mookherjee D, Ray D (2001) Readings in the theory of economic development. Blackwell, New YorkGoogle Scholar
  26. Nerlove M (1971) Further evidence of the estimation of dynamic economic relations from time-series of cross-sections. Econometrica 39:359–382CrossRefGoogle Scholar
  27. Nurkse R (1953) Problems of capital formation in underdeveloped countries. Oxford University Press, New YorkGoogle Scholar
  28. Quah D (1993) Empirical cross-section dynamics in economic growth. Eur Econ Rev 37:426–434CrossRefGoogle Scholar
  29. Quah D (1996) Convergence empirics across economies with (some) capital mobility. J Econ Growth 1:95–124CrossRefGoogle Scholar
  30. Quah D (1997) Empirics for growth and distribution: stratification, polarization, and convergence clubs. J Econ Growth 2:27–59CrossRefGoogle Scholar
  31. Romer P (1986) Increasing returns and long-run growth. J Political Econ 94:1002–1037CrossRefGoogle Scholar
  32. Rosenstein-Rodan P (1943) The problem of industrialization of eastern and south-eastern Europe. Econ J 53:202–211CrossRefGoogle Scholar
  33. Saikkonen P (1989) Asymptotic relative efficiency of the classical tests under misspecification. J Econom 42:351–369CrossRefGoogle Scholar
  34. Sosa-Escudero W, Marchionni M, Arias O (2011) Sources of income persistence: evidence from rural El Salvador. J Income Distrib 20:3–28Google Scholar
  35. Wooldridge JM (2002) Econometric analysis of cross section and panel data. MIT Press, CambridgeGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  • Federico Zincenko
    • 1
  • Walter Sosa-Escudero
    • 2
  • Gabriel Montes-Rojas
    • 3
    • 4
    Email author
  1. 1.Department of EconomicsUniversity of PittsburghPittsburghUSA
  2. 2.Department of EconomicsUniversidad de San Andrés and CONICETVictoria, Buenos AiresArgentina
  3. 3.CONICET-Universidad de San AndrésVictoria, Buenos AiresArgentina
  4. 4.Department of EconomicsCity University LondonLondonUK

Personalised recommendations