BUSINESS APPLICATION LAB SESSION-8

Do a Panel data analysis of "produc" data from "plm"  package using three models
1.Pooled
2.Fixed
3.Random
And analyze which model is best suited:
       pFtest : for determining between fixed and pooled
       plmtest : for determining between pooled and random
       phtest: for determining between random and fixed

Commands:
Loading data:
> data(Produc , package ="plm")
> head(Produc)

Pooled Affect Model

> pool <- plm(log(pcap)~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) + log(emp) + log(unemp) , data =Produc, model=("pooling"), index = c("state","year"))
> summary(pool)
 

Fixed Affect Model:

> fixed <- plm(log(pcap)~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) + log(emp) + log(unemp) , data =Produc, model=("within"), index = c("state","year"))

> summary(fixed)

Random Affect Model:

> random <- plm(log(pcap)~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) + log(emp) + log(unemp) , data =Produc, model=("random"), index = c("state","year"))

> summary(random)

Comparison

The comparison between the models would be a Hypothesis testing based on the following concept:

H0: Null Hypothesis: the individual index and time based parameters are all zero

H1: Alternate Hypothesis: atleast one of the index and time based parameter is non zero

Pooled vs Fixed

Null Hypothesis: Pooled Affect Model

Alternate Hypothesis : Fixed Affect Model

Command:

> pFtest(fixed,pool)

Result:

data:  log(pcap) ~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) +      log(emp) + log(unemp)
F = 56.6361, df1 = 47, df2 = 761, p-value < 2.2e-16
alternative hypothesis: significant effects

Since the p value is negligible so we reject the Null Hypothesis and hence Alternate hypothesis is accepted which is to accept Fixed Affect Model.

Pooled vs Random

Null Hypothesis: Pooled Affect Model

Alternate Hypothesis: Random Affect Model

Command :

> plmtest(pool)

Result:

        Lagrange Multiplier Test - (Honda)

data:  log(pcap) ~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) +      log(emp) + log(unemp)

normal = 57.1686, p-value < 2.2e-16
alternative hypothesis: significant effects

Since the p value is negligible so we reject the Null Hypothesis and hence Alternate hypothesis is accepted which is to accept Random Affect Model.

Random vs Fixed

Null Hypothesis: No Correlation . Random Affect Model

Alternate Hypothesis: Fixed Affect Model

Command:

 > phtest(fixed,random)

Result:

        Hausman Test

data:  log(pcap) ~ log(hwy) + log(water) + log(util) + log(pc) + log(gsp) +      log(emp) + log(unemp)

chisq = 93.546, df = 7, p-value < 2.2e-16
alternative hypothesis: one model is inconsistent

Since the p value is negligible so we reject the Null Hypothesis and hence Alternate hypothesis is accepted which is to accept Fixed Affect Model.

Conclusion:

Hence the Fixed model is most suited for panel data analysis of the data"Produc".