Testing for IIA with the Hausman-Mcfadden Test
52 Pages Posted: 11 Jul 2011
Abstract
The Independence of Irrelevant Alternatives assumption inherent in multinomial logit models is most frequently tested with a Hausman-McFadden test. As is confirmed by many findings in the literature, this test sometimes produces negative outcomes, in contradiction of its asymptotic χ² distribution. This problem is caused by the use of an improper variance matrix and may lead to an invalid statistical inference even when the test value is positive. With a correct specification of the variance, the sampling distribution for small samples is indeed close to a χ² distribution.
Keywords: multinomial logit, IIA assumption, Hausman-McFadden test
JEL Classification: C12, C35
Suggested Citation: Suggested Citation