Making Theoretically Informed Choices in Specifying Panel‐Data Models

We argue that in analyzing panel-data econometric models, researchers rely excessively on statistical criteria to determine model specification, treating it primarily as a matter of inference. This inferential emphasis is most obvious the common practice using tests (e.g., Hausman test) choose between fixed- and random-effects specifications, often ignoring assumptions underpinning these tests. For instance, test depends true within-panel (longitudinal) between-panel (cross-sectional) parameters being equal. assumption not justified, because longitudinal cross-sectional variances covariances may manifest different mechanisms. In addition mechanisms resulting variables determining within effects, also have meanings. To help make theoretically informed choices, we formulate five questions can guide think specification rigorous way. examine issues with examples from both general management operations research. Importantly, addressing regarding must involve theoretical contextual judgment,