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Specification Tests: Ramsey RESET and Hausman Tests

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Hypothesis Testing in RegressionOmitted Variable Bias+1 more→→Sensitivity Analysis and Robustness Checks
specification hypothesis-testing model-diagnostics

Core Idea

Specification tests formally check whether key assumptions hold. The RESET test detects omitted nonlinearities by adding powers of fitted values; Hausman tests compare two estimators to detect endogeneity or misspecification.

Explainer

Your work on hypothesis testing in regression gave you the tools to test whether individual coefficients are zero. Specification tests take that logic up a level: instead of testing a coefficient, you test whether the model itself is correctly formulated. The two most important tools — the Ramsey RESET test and the Hausman test — each target a different type of misspecification.

The RESET test (Regression Equation Specification Error Test) addresses functional form misspecification. Your prerequisites covered omitted variable bias: if a variable belongs in the model but isn't included, OLS estimates are biased. Ramsey's insight was that you don't need to know what the omitted variable is — if the functional form is wrong, the fitted values ŷ will contain information about the missing structure. The procedure: run your original regression, save the fitted values, then add ŷ², ŷ³ (and optionally ŷ⁴) to the model and test their joint significance with an F-test. If those powers are significant, the original model is misspecified — something nonlinear belongs in the regression. The RESET test is a general-purpose alarm: it tells you something is wrong, but not what to add. It's useful as a quick check before reporting results.

The Hausman test operates on a different principle: comparing two estimators that both converge to the same value under the null hypothesis but differ under the alternative. The most common application is testing for endogeneity. OLS is efficient under exogeneity; instrumental variables (IV) is consistent even under endogeneity but less efficient. Under the null that OLS is consistent, the OLS and IV estimates should be close. If they differ systematically — which the Hausman statistic formalizes — that's evidence that OLS is inconsistent due to endogeneity, and IV should be preferred. The test statistic is (β̂_IV - β̂_OLS)'[Var(β̂_IV) - Var(β̂_OLS)]⁻¹(β̂_IV - β̂_OLS), which is chi-squared distributed under the null.

The broader lesson is that regression results should be reported alongside a suite of diagnostics, not just coefficients and standard errors. A model that passes the RESET test provides more credibility that the functional form is correct. A model where OLS and a valid IV give similar results provides evidence against endogeneity. Neither test is foolproof — the RESET test can miss certain misspecifications, and the Hausman test requires a valid instrument — but together they constitute a minimum standard for responsible empirical work.

Practice Questions 5 questions

Prerequisite Chain

Understanding Zero → The Number Zero → Counting to Five → Counting to 10 → Counting to 20 → Counting a Set of Objects Up to 20 → Cardinality: The Last Number Counted → Matching Numerals to Quantities → Subitizing Small Quantities → Addition Within 10 → Number Bonds to 10 → Addition Within 20 → Doubles and Near Doubles → Doubles Facts Within 10 → Near Doubles Facts Within 20 → Mental Math Strategies for Addition → Mental Math: Adding and Subtracting Tens → Addition Within 100 → Repeated Addition as Multiplication → Multiplication as Equal Groups → Multiplication: Arrays → Basic Multiplication Facts (0s, 1s, 2s, 5s, 10s) → Multiplication Facts Within 100 → Division as Equal Sharing → Division as Grouping (Measurement Division) → Division: Grouping (Repeated Subtraction) Model → Division: Fair Sharing Model → Division as Equal Sharing → Division as Grouping → Basic Division Facts → Division Facts Within 100 → Multiplication and Division Fact Families → Relationship Between Multiplication and Division → Division Facts as Inverse of Multiplication → Remainders and Quotients in Division → Division Word Problems → Multi-Step Word Problems → Solving Multi-Step Word Problems → Multiplication Word Problems → Division Word Problems → Introduction to Long Division → Factors and Multiples → Prime and Composite Numbers → Equivalent Fractions → Relating Fractions and Decimals → Decimal Place Value → Integers and the Number Line → Comparing and Ordering Integers → Absolute Value → Adding Integers → Subtracting Integers → Multiplying Integers → Dividing Integers → Unit Rates → Proportions → Percent Concept → Converting Between Fractions, Decimals, and Percents → Operations with Rational Numbers → Two-Step Equations → Solving Multi-Step Equations → Equations with Variables on Both Sides → Angle Pairs: Complementary, Supplementary, and Vertical → Parallel Lines and Transversals → Corresponding Angles → Alternate Interior Angles → Triangle Angle Sum Theorem → Exterior Angle Theorem → Triangle Inequality Theorem → Similar Triangles: AA Similarity → Similar Triangles: SSS and SAS Similarity → Proportions in Similar Triangles → Right Triangle Trigonometry Introduction → Sine, Cosine, and Tangent Ratios → Trigonometric Ratios Review → Radian Measure → Converting Between Degrees and Radians → The Unit Circle → Graphing Sine and Cosine → Graphing Tangent and Reciprocal Trigonometric Functions → Derivatives of Trigonometric Functions → Antiderivatives → Indefinite Integrals → Basic Integration Rules → Riemann Sums → Definite Integral Definition → Probability Density Functions and Continuous Distributions → Cumulative Distribution Functions → Continuous Random Variables → Probability Density Functions → Expected Value → Weak Law of Large Numbers → Probability Axioms and Rules → Conditional Probability → Independence of Events → Sampling Distributions → Standard Error of Estimators → Hypothesis Testing: Framework and Logic → P-values and Statistical Significance → Effect Size and Practical Significance → Hypothesis Testing: Framework and Logic → Z-Tests and T-Tests for Means → One-Sample Z-Test for Means → One-Sample and Two-Sample T-Tests → Inference in Linear Regression → Prediction Intervals in Regression → Linear Regression Basics → Residuals and Goodness of Fit (R²) → Simple (Bivariate) OLS Regression → Classical OLS Assumptions (Gauss-Markov) → Multiple Regression → Interpreting Regression Coefficients → Hypothesis Testing in Regression → F-Test and Joint Significance → R-Squared and Model Fit → Omitted Variable Bias → Specification Tests: Ramsey RESET and Hausman Tests

Longest path: 116 steps · 585 total prerequisite topics

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