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Specification Testing in Panel Data With Instrumental Variables

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  • Gilbert E. Metcalf

Abstract

This paper shows a convenient way to test whether instrumental variables are correlated with individual effects in a panel data set. It shows that the correlated fixed effects specification tests developed by Hausman and Taylor (1981) extend in an analogous way to panel data sets with endogenous right hand side variables. In the panel data context, different sets of instrumental variables can be used to construct the test. Asymptotically, I show that the test in many cases is more efficient if an incomplete set of instruments is used. However, in small samples one is likely to do better using the complete set of instruments. Monte Carlo results demonstrate the likely gains for different assumptions about the degree of variance in the data across observations relative to variation across time.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0123.

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Date of creation: Jun 1996
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Publication status: published as Journal of Econometrics, vol. 71, pp. 291-307, (1996).
Handle: RePEc:nbr:nberte:0123

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  1. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, Econometric Society, vol. 58(4), pages 967-76, July.
  2. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  3. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1377-98, November.
  4. Holtz-Eakin, Douglas, 1988. "Testing for individual effects in autoregressive models," Journal of Econometrics, Elsevier, Elsevier, vol. 39(3), pages 297-307, November.
  5. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1251-71, November.
  6. Holly, Alberto, 1982. "A Remark on Hausman's Specification Test," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 749-59, May.
  7. Baltagi, Badi H., 1981. "Simultaneous equations with error components," Journal of Econometrics, Elsevier, Elsevier, vol. 17(2), pages 189-200, November.
  8. K. Newey, Whitney, 1985. "Generalized method of moments specification testing," Journal of Econometrics, Elsevier, Elsevier, vol. 29(3), pages 229-256, September.
  9. Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 51(1-2), pages 151-181.
  10. Maddala, G S, 1971. "The Use of Variance Components Models in Pooling Cross Section and Time Series Data," Econometrica, Econometric Society, Econometric Society, vol. 39(2), pages 341-58, March.
  11. Nelson, C. & Startz, R., 1988. "The Distribution Of The Instrumental Variables Estimator And Its T-Ratio When The Instrument Is A Poor One," Working Papers, University of Washington, Department of Economics 88-07, University of Washington, Department of Economics.
  12. Amemiya, Takeshi & MaCurdy, Thomas E, 1986. "Instrumental-Variable Estimation of an Error-Components Model," Econometrica, Econometric Society, Econometric Society, vol. 54(4), pages 869-80, July.
  13. Breusch, Trevor S & Mizon, Grayham E & Schmidt, Peter, 1989. "Efficient Estimation Using Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 57(3), pages 695-700, May.
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Cited by:
  1. Edward Barbier, 2007. "Frontiers and sustainable economic development," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 37(1), pages 271-295, May.
  2. Peter Egger, 2008. "On the role of distance for outward FDI," The Annals of Regional Science, Springer, Springer, vol. 42(2), pages 375-389, June.
  3. Chihwa Kao & Yongmiao Hong, 2004. "Detecting Neglected Nonlinearity in Dynamic Panel Data with Time-Varying Conditional Heteroskedasticity," Econometric Society 2004 Far Eastern Meetings, Econometric Society 753, Econometric Society.
  4. Lee, Yoon-Jin, 2014. "Testing a linear dynamic panel data model against nonlinear alternatives," Journal of Econometrics, Elsevier, Elsevier, vol. 178(P1), pages 146-166.
  5. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 16, Center for Policy Research, Maxwell School, Syracuse University.
  6. Su, Liangjun & Lu, Xun, 2013. "Nonparametric dynamic panel data models: Kernel estimation and specification testing," Journal of Econometrics, Elsevier, Elsevier, vol. 176(2), pages 112-133.

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