A Full Heteroscedastic One-Way Error Components Model for Incomplete Panel : Maximum Likelihood Estimation and Lagrange Multiplier Testing

In this paper, we study maximum likelihood estimation and Lagrange multiplier testing of a one-way error components regression model suitable for incomplete panel and including parametrically specified variance functions for both individual-specific and general error disturbances. All the required ingredients for obtaining the ML estimates are provided. We also derive two Lagrange multiplier test statistics (based on OLS residuals) for jointly testing the null of no individual effects and homoscedasticity. Further, we discuss a Bonferroni multiple comparison procedure intended for identifying the source(s) of departure from the joint null when it is rejected. The practical usefulness of the model and the testing procedures are illustrated by an empirical example in the production analysis field.