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

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  • 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
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    4. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, vol. 77(2), pages 211-220, October.
    5. Kiviet, Jan F., 2020. "Testing the impossible: Identifying exclusion restrictions," Journal of Econometrics, Elsevier, vol. 218(2), pages 294-316.
    6. Sebastian Kripfganz & Jan F. Kiviet, 2021. "kinkyreg: Instrument-free inference for linear regression models with endogenous regressors," Stata Journal, StataCorp LLC, vol. 21(3), pages 772-813, September.
    7. 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.
    8. Russell Davidson & James G. MacKinnon, 2015. "Bootstrap Tests for Overidentification in Linear Regression Models," Econometrics, MDPI, vol. 3(4), pages 1-39, December.
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    Cited by:

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    Keywords

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    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

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