st: Re: Hausman Test when the RE OLS model includes time-constant variables

["Pavlos C. Symeou" <p.symeou@jbs.cam.ac.uk>]

Rodrigo,

Thanks for your reply. I understand that there might be correlation 
between the random effect and x(i,t) using the RE. However, the RE model 
on the one hand allows me to include the industry dummies (crucial for 
the model's specification) and on the other hand most coefficients are 
statistically significant and support my theoretical arguments. To the 
contrary, in order to include the industry dummies in the FE model, I 
need to create interactions and even if I do that, the model hardly 
explains any relationship as all of my coefficients are statistically 
insignificant. In addition, the RE reports much higher R-squares (around 
0.3) than the FE (around 0.02). Is there a way that I can account for 
this correlation whilst maintaining my existing (and only) variables in 
the model?

Thanks,

Pavlos


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