The appealing but complex Hausman and Taylor (1981) random effects (instrumental variable) estimator requires prior knowledge that certain explanatory variables in a panel are uncorrelated with the latent group effects. The purpose of this examination is to outline a tractable variable pretest that facilitates the initial sorting of regressors as likely exogenous or endogenous. The variable pretest proposed herein builds on the pretest estimator suggested by Baltagi et al (2003) by providing the necessary foundation for regressor identification. Extensions are suggested for the two-way error components construct.
Keywords: Panel data, Random effects, Variable pretest, Hausman-Taylor.
JEL Classification: C12, C13, C23.
ISSN: 2241-0376 (Online)