Power Properties of the Sargan Test in the Presence of Measurement Errors in Dynamic Panels
AbstractThis paper investigates the power properties of the Sargan test in the presence of measurement errors in dynamic panel data models. The general conclusion from the Monte Carlo simulations is that the Sargan test, in many cases, leads the econometrician to accept misspecified models with sometimes severely biased parameter estimates as a result. This is especially true when the number of cross-sectional units is small and when there are measurement errors in the dependent variable. To investigate if the simulation results have any bearing in real applications, we used the data in Arellano and Bond (1991) and re-estimated their employment equations with the difference that we deliberately imposed additive and multiplicative measurement errors in the employment and wage variables. It turned out that the Sargan test always accepted the misspecified models while we at the same time ended up with biased parameter estimates. The conclusion from this paper is that in the very likely case of measurement errors in either the dependent or any of the independent variables, we will, if we rely on the Sargan test, quite likely accept a misspecified model and end up with biased results.
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Bibliographic InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2002:13.
Length: 20 pages
Date of creation: 31 Jul 2002
Date of revision:
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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
More information through EDIRC
Sargan test; Measurement errors; Dynamic panels;
Other versions of this item:
- Matz Dahlberg & Eva Mork & Per Tovmo, 2008. "Power properties of the Sargan test in the presence of measurement errors in dynamic panels," Applied Economics Letters, Taylor & Francis Journals, vol. 15(5), pages 349-353.
- 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
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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