IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v205y2021ics0165176521002123.html
   My bibliography  Save this article

Instrument approval by the Sargan test and its consequences for coefficient estimation

Author

Listed:
  • Kiviet, Jan F.
  • Kripfganz, Sebastian

Abstract

Empirical econometric findings are often vindicated by supplementing them with the p-values of Sargan–Hansen tests for overidentifying restrictions, provided these exceed a chosen small nominal significance level. It is illustrated here that the probability that such tests reject instrument validity may often barely exceed small levels, even when instruments are seriously invalid, whereas even minor invalidity of instruments can severely undermine inference on regression coefficients by instrumental variable estimators. These uncomfortable patterns may be aggravated when particular valid or invalid instruments are relatively weak or strong.

Suggested Citation

  • Kiviet, Jan F. & Kripfganz, Sebastian, 2021. "Instrument approval by the Sargan test and its consequences for coefficient estimation," Economics Letters, Elsevier, vol. 205(C).
    • Handle: RePEc:eee:ecolet:v:205:y:2021:i:c:s0165176521002123
    DOI: 10.1016/j.econlet.2021.109935
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176521002123
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2021.109935?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Kiviet Jan F., 2017. "Discriminating between (in)valid External Instruments and (in)valid Exclusion Restrictions," Journal of Econometric Methods, De Gruyter, vol. 6(1), pages 1-9, January.
    3. Sebastian Kripfganz & Jan F. Kiviet, 2021. "kinkyreg: Instrument-free inference for linear regression models with endogenous regressors," Stata Journal, StataCorp LP, vol. 21(3), pages 772-813, September.
    4. Russell Davidson & James G. MacKinnon, 2015. "Bootstrap Tests for Overidentification in Linear Regression Models," Econometrics, MDPI, vol. 3(4), pages 1-39, December.
    5. Kiviet, Jan F., 2020. "Testing the impossible: Identifying exclusion restrictions," Journal of Econometrics, Elsevier, vol. 218(2), pages 294-316.
    6. Jan Kiviet & Milan Pleus & Rutger Poldermans, 2017. "Accuracy and Efficiency of Various GMM Inference Techniques in Dynamic Micro Panel Data Models," Econometrics, MDPI, vol. 5(1), pages 1-54, March.
    7. Parente, Paulo M.D.C. & Santos Silva, J.M.C., 2012. "A cautionary note on tests of overidentifying restrictions," Economics Letters, Elsevier, vol. 115(2), pages 314-317.
    8. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luqi Yuan & Shihong Zeng, 2023. "An Empirical Study on the Impact of Green Credit on Financial Performance of China’s Listed Banks," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 13(2), pages 1-5.
    2. Kiviet, Jan F., 2023. "Instrument-free inference under confined regressor endogeneity and mild regularity," Econometrics and Statistics, Elsevier, vol. 25(C), pages 1-22.
    3. mohammed, habib, 2023. "Modeling Determinants of Private Banks Profitability in Ethiopia," MPRA Paper 116699, University Library of Munich, Germany.
    4. mohammed, habib, 2023. "Modeling Determinants of Private Banks Profitability in Ethiopia," MPRA Paper 116817, University Library of Munich, Germany, revised 25 Mar 2023.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Seyed Morteza Emadi, 2024. "Testing the Exogeneity of Instrumental Variables and Regressors in Linear Regression Models Using Copulas," Papers 2401.15253, arXiv.org.
    2. Kiviet, Jan F., 2020. "Testing the impossible: Identifying exclusion restrictions," Journal of Econometrics, Elsevier, vol. 218(2), pages 294-316.
    3. Kiviet, Jan F., 2023. "Instrument-free inference under confined regressor endogeneity and mild regularity," Econometrics and Statistics, Elsevier, vol. 25(C), pages 1-22.
    4. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
    5. Baharumshah, Ahmad Zubaidi & Slesman, Ly & Wohar, Mark E., 2016. "Inflation, inflation uncertainty, and economic growth in emerging and developing countries: Panel data evidence," Economic Systems, Elsevier, vol. 40(4), pages 638-657.
    6. Maurice J.G. Bun & Sarafidis, V., 2013. "Dynamic Panel Data Models," UvA-Econometrics Working Papers 13-01, Universiteit van Amsterdam, Dept. of Econometrics.
    7. Awaworyi Churchill, Sefa & Hayward, Mathew & Smyth, Russell & Trinh, Trong-Anh, 2023. "Crime, community social capital and entrepreneurship: Evidence from Australian communities," Journal of Business Venturing, Elsevier, vol. 38(2).
    8. Sun, Xianming & Xiao, Shiyi & Ren, Xiaohang & Xu, Bing, 2023. "Time-varying impact of information and communication technology on carbon emissions," Energy Economics, Elsevier, vol. 118(C).
    9. Ketz, Philipp, 2019. "Testing overidentifying restrictions with a restricted parameter space," Economics Letters, Elsevier, vol. 185(C).
    10. Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland Institute for Emerging Economies (BOFIT).
    11. Hak Yeung & Jürgen Huber, 2022. "Further Evidence on China’s B&R Impact on Host Countries’ Quality of Institutions," Sustainability, MDPI, vol. 14(9), pages 1-17, May.
    12. Francis Teal & Måns Söderbom, 2002. "Does firm size really affect earnings?," Economics Series Working Papers WPS/2002-08, University of Oxford, Department of Economics.
    13. Bravo-Ortega, Claudio & García Marín, Álvaro, 2011. "R&D and Productivity: A Two Way Avenue?," World Development, Elsevier, vol. 39(7), pages 1090-1107, July.
    14. Frank Windmeijer, 2019. "Two-stage least squares as minimum distance," The Econometrics Journal, Royal Economic Society, vol. 22(1), pages 1-9.
    15. Sylvester C. W. Eijffinger & Benedikt Goderis, 2008. "The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt, Institutions, and Financial Openness," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 559-575, August.
    16. Kiviet Jan F., 2017. "Discriminating between (in)valid External Instruments and (in)valid Exclusion Restrictions," Journal of Econometric Methods, De Gruyter, vol. 6(1), pages 1-9, January.
    17. Wang, Haining & Cheng, Zhiming, 2022. "Kids eat free: School feeding and family spending on education," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 196-212.
    18. Manuel R. Agosin & Roberto Alvarez & Claudio Bravo‐Ortega, 2012. "Determinants of Export Diversification Around the World: 1962–2000," The World Economy, Wiley Blackwell, vol. 35(3), pages 295-315, March.
    19. Daskalakis, Nikolaos & Balios, Dimitrios & Dalla, Violetta, 2017. "The behaviour of SMEs' capital structure determinants in different macroeconomic states," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 248-260.
    20. Jan F. Kiviet, 2005. "Judging Contending Estimators by Simulation: Tournaments in Dynamic Panel Data Models," Tinbergen Institute Discussion Papers 05-112/4, Tinbergen Institute.

    More about this item

    Keywords

    Endogeneity testing; Instrument validity; Instrument weakness; Size control; Simulation; Test power;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:205:y:2021:i:c:s0165176521002123. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.