Efficient GMM and Weighting Matrix under Misspecification

This paper develops efficient GMM estimation when the moment conditions are misspecified. We observe that the influence function of the standard GMM estimator under misspecification depends on both the original moment conditions and their Jacobian, motivating a new class of estimators based on augmented moment conditions with recentering. The standard GMM estimator is a special case within this class, and generally suboptimal. By optimally weighting the augmented system, we obtain a misspecification-efficient (ME) estimator with the smallest asymptotic variance for the same GMM pseudo-true value. In linear models, the asymptotic variance of ME estimator reduces to the textbook efficient-GMM variance formula $(G'W^{*}G)^{-1}$, where $W^{*}$ is the inverse of the variance of residualized moments after projection on the Jacobian $G$. We consider a feasible double-recentered bootstrap estimator, which can be considered as a misspecification-robust and efficient version of Hall and Horowitz (1996) recentered bootstrap GMM estimator, and also consider a split-sample ME estimator. Finally, we establish uniform local asymptotic minimax bounds over a class of weighting matrices. We illustrate the proposed methods in simulation and empirical examples.