Type author name/s here

Dougherty

Introduction to Econometrics,
5th edition
Chapter heading
Chapter 8: Stochastic Regressors
and Measurement Errors

© Christopher Dougherty, 2016. All rights reserved.

 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------

When we regressed the logarithm of earnings on years of schooling and other regressors
using EAWE Data Set 21, we obtained the output shown above.

1
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------

In some data sets the schooling variable is known to be subject to serious measurement
error. Sometimes it accounts for as much as 10 percent of the variance in the schooling
data.
2
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------

If that is the case, the OLS coefficient of schooling will tend to be downwards biased and
one should consider using the instrumental variables approach to fit the regression model.

3
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
Instrumental variables (2SLS) regression Number of obs = 500
Wald chi2(6) = 60.06
Prob > chi2 = 0.0000
R-squared = 0.0986
Root MSE = .52451
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548
EXP | .075178 .0221817 3.39 0.001 .0317028 .1186533
ASVABC | -.0462667 .0649699 -0.71 0.476 -.1736053 .0810719
MALE | .2248619 .0529356 4.25 0.000 .1211101 .3286137
ETHBLACK | -.0877496 .0752117 -1.17 0.243 -.2351618 .0596626
ETHHISP | -.0809983 .075204 -1.08 0.281 -.2283955 .0663989
_cons | -.207246 .8240217 -0.25 0.801 -1.822299 1.407807
----------------------------------------------------------------------------
Instrumented: S
Instruments: EXP ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS
----------------------------------------------------------------------------

Here we have used SM, mother's years of schooling, SF, father's years of schooling, and
SIBLINGS, number of brothers and sisters, to instrument for S.

4
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
Instrumental variables (2SLS) regression Number of obs = 500
Wald chi2(6) = 60.06
Prob > chi2 = 0.0000
R-squared = 0.0986
Root MSE = .52451
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548
EXP | .075178 .0221817 3.39 0.001 .0317028 .1186533
ASVABC | -.0462667 .0649699 -0.71 0.476 -.1736053 .0810719
MALE | .2248619 .0529356 4.25 0.000 .1211101 .3286137
ETHBLACK | -.0877496 .0752117 -1.17 0.243 -.2351618 .0596626
ETHHISP | -.0809983 .075204 -1.08 0.281 -.2283955 .0663989
_cons | -.207246 .8240217 -0.25 0.801 -1.822299 1.407807
----------------------------------------------------------------------------
Instrumented: S
Instruments: EXP ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS
----------------------------------------------------------------------------

The Stata command is 'ivregress 2sls', followed by the dependent variable, then a list of
explanatory variables not being instrumented, and finally, in parentheses, the variable(s)
being instrumented, followed by an = sign, followed by a list of instruments.
5
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
Instrumental variables (2SLS) regression Number of obs = 500
Wald chi2(6) = 60.06
Prob > chi2 = 0.0000
R-squared = 0.0986
Root MSE = .52451
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548
EXP | .075178 .0221817 3.39 0.001 .0317028 .1186533
ASVABC | -.0462667 .0649699 -0.71 0.476 -.1736053 .0810719
MALE | .2248619 .0529356 4.25 0.000 .1211101 .3286137
ETHBLACK | -.0877496 .0752117 -1.17 0.243 -.2351618 .0596626
ETHHISP | -.0809983 .075204 -1.08 0.281 -.2283955 .0663989
_cons | -.207246 .8240217 -0.25 0.801 -1.822299 1.407807
----------------------------------------------------------------------------
Instrumented: S
Instruments: EXP ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS
----------------------------------------------------------------------------

Here we have just one variable being instrumented, S, and three instruments, SM, SF, and
SIBLINGS.

6
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548

The instrumental variable estimate of the schooling coefficient is larger than the OLS one.
The reason may be that measurement error in S may indeed be a problem, causing the OLS
estimate to be downwards biased.
7
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548

However, another possibility is that the difference is purely random. Note that the IV
estimate has a relatively large standard error.

8
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
. cor S SM SF SIBLINGS
LGEARN | Coef. Std. Err.
(obs=500) z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
| S SM SF SIBLINGS
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548
-------------+------------------------------------
S | 1.0000
SM | 0.3476 1.0000
SF | 0.4111 0.5312 1.0000
SIBLINGS | -0.1707 -0.2370 -0.1863 1.0000

This is because SM is only weakly correlated with the instruments. In general, the weaker
the correlation between the instrument(s) and the variable being instrumented, the greater
is the population variance of the coefficient.
9
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548

The Durbin–Wu–Hausman test may enable us to discriminate between these two

possibilities.

10
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. ivregress 2sls LGEARN EXP ASVABC MALE ETHBLACK ETHHISP (S=SM SF SIBLINGS)
----------------------------------------------------------------------------
Instrumental variables (2SLS) regression Number of obs = 500
Wald chi2(6) = 60.06
Prob > chi2 = 0.0000
R-squared = 0.0986
Root MSE = .52451
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .1660833 .0468231 3.55 0.000 .0743117 .2578548
EXP | .075178 .0221817 3.39 0.001 .0317028 .1186533
ASVABC | -.0462667 .0649699 -0.71 0.476 -.1736053 .0810719
MALE | .2248619 .0529356 4.25 0.000 .1211101 .3286137
ETHBLACK | -.0877496 .0752117 -1.17 0.243 -.2351618 .0596626
ETHHISP | -.0809983 .075204 -1.08 0.281 -.2283955 .0663989
_cons | -.207246 .8240217 -0.25 0.801 -1.822299 1.407807
----------------------------------------------------------------------------
Instrumented: S
Instruments: EXP ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS
----------------------------------------------------------------------------
. estimates store EARNIV

To implement the DWH test using Stata, you first fit the IV version, and follow with the
command ‘estimates store‘ followed by a name for the IV regression (here ‘EARNIV’).

11
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------
. estimates store EARNOLS

You then fit the OLS version, and follow with the command 'estimates store’ followed by
a name for the OLS regression (here, 'EARNOLS').

12
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------
. estimates store EARNOLS
. hausman EARNIV EARNOLS, constant

To perform the test, you give the command 'hausman’ followed by the name you gave to the
IV regression, then the name of the OLS regression, followed by a comma, and then
‘constant’, as shown.
13
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

. reg LGEARN S EXP ASVABC MALE ETHBLACK ETHHISP

----------------------------------------------------------------------------
Source | SS df MS Number of obs = 500
-----------+------------------------------ F( 6, 493) = 17.74
Model | 27.095039 6 4.51583983 Prob > F = 0.0000
Residual | 125.504181 493 .254572375 R-squared = 0.1776
-----------+------------------------------ Adj R-squared = 0.1675
Total | 152.59922 499 .30581006 Root MSE = .50455
----------------------------------------------------------------------------
LGEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------+----------------------------------------------------------------
S | .0861981 .0116094 7.42 0.000 .0633881 .1090081
EXP | .040171 .0095703 4.20 0.000 .0213674 .0589746
ASVABC | .0532041 .0311362 1.71 0.088 -.0079719 .1143802
MALE | .1836208 .0456965 4.02 0.000 .0938369 .2734046
ETHBLACK | -.0500039 .0693654 -0.72 0.471 -.1862922 .0862845
ETHHISP | -.0770653 .07231 -1.07 0.287 -.2191391 .0650084
_cons | 1.193798 .2139209 5.58 0.000 .7734886 1.614107
----------------------------------------------------------------------------
. estimates store EARNOLS
. hausman EARNIV EARNOLS, constant

(If the constant does not have the same meaning in the IV and OLS regression, omit the
comma and ‘constant’. The constant will then not be included in the comparison of the
coefficients.)
14
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

The last command produces the test statistics shown above. In the top left corner the IV
and OLS estimates of the coefficients are compared. IV is column (b), OLS column (B).

15
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid

The null hypothesis is that there is no violation of Assumption B.7. If it is true, there will be
no significant difference in the estimates.

16
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid

The IV estimator b will be consistent under both the null hypothesis and the alternative.
The OLS estimator B will be consistent (and unbiased), and more efficient than the IV
estimator under the null hypothesis, but it will be inconsistent if the null hypothesis is false.
17
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid

If the null hypothesis is true, there was no need to use IV and it is actually undesirable
because it will be less efficient than OLS.

18
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid

If the null hypothesis is false, however, IV is preferred because the OLS estimates will be
inconsistent.

19
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid

Under the null hypothesis, the test statistic has a chi-squared distribution with degrees of
freedom usually equal to the number of coefficients being compared. However under
certain conditions the number of degrees of freedom may be smaller.
20
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid  2  7  crit, 5%  14.07

In this case there are 7 degrees of freedom. The test statistic is lower than the critical value
of chi-squared at the 5 percent significance level.

21
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid  2  7  crit, 5%  14.07

Thus we do not reject the null hypothesis. As far as we can tell, there is no significant
measurement error.

22
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid  2  7  crit, 5%  14.07

This is almost certainly the right conclusion in this case, because the schooling histories of
the respondents in the NLSY have been recorded with great care.

23
 DURBIN–WU–HAUSMAN SPECIFICATION TEST

| ---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| EARNIV EARNOLS Difference S.E.
-----------+----------------------------------------------------------------
S | .1660833 .0861981 .0798852 .045361
EXP | .075178 .040171 .0350071 .0200109
ASVABC | -.0462667 .0532041 -.0994708 .057023
MALE | .2248619 .1836208 .0412411 .026721
ETHBLACK | -.0877496 -.0500039 -.0377457 .0290729
ETHHISP | -.0809983 -.0770653 -.003933 .0206618
_cons | -.207246 1.193798 -1.401044 .7957698
----------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from ivregress
B = inconsistent under Ha, efficient under Ho; obtained from regress
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 3.10
Prob>chi2 = 0.8755

H0: Assumption B.7 is valid  2  7  crit, 5%  14.07

However, if the test statistic is not significant, this does not necessarily mean that the null
hypothesis is true. It could be that it is false, but the instruments used in IV are so weak
that the differences between the IV and OLS estimates are not significant.
24
Copyright Christopher Dougherty 2016.

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2016.05.08