Random-Effects, Fixed-Effects and the within-between Specification for Clustered Data in Observational Health Studies: A Simulation Study
Figure 5
The solid orange lines show the share of the simulations for which the Hausman test does not reject, at the 90% confidence level, the null hypothesis that both RE and FE estimation are consistent. Conventional wisdom is that this suggests that researchers should use RE estimation as it is more efficient. The dashed orange lines show the share of the simulations for which the Hausman test suggests the estimator with smaller absolute error. The red background indicates when the RE estimator is MSE-preferred, while the blue background indicates when the FE estimator is MSE-preferred. The white regions indicate that the difference between the MSE of the two estimators is trivial. All simulation inputs are baseline.