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Specification Testing In Panel Data With Instrumental Variables

Author

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  • Metcalf, G.E.

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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Suggested Citation

  • Metcalf, G.E., 1991. "Specification Testing In Panel Data With Instrumental Variables," Papers 358, Princeton, Department of Economics - Econometric Research Program.
    • Handle: RePEc:fth:prinem:358
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    2. Peter Egger, 2008. "On the role of distance for outward FDI," The Annals of Regional Science, Springer;Western Regional Science Association, 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 753, Econometric Society.
    4. Su, Liangjun & Lu, Xun, 2013. "Nonparametric dynamic panel data models: Kernel estimation and specification testing," Journal of Econometrics, Elsevier, vol. 176(2), pages 112-133.
    5. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
    6. Beste Hamiye Beyaztas & Soutir Bandyopadhyay & Abhijit Mandal, 2021. "A robust specification test in linear panel data models," Papers 2104.07723, arXiv.org.
    7. Edward Barbier, 2007. "Frontiers and sustainable economic development," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 271-295, May.
    8. Lee, Yoon-Jin, 2014. "Testing a linear dynamic panel data model against nonlinear alternatives," Journal of Econometrics, Elsevier, vol. 178(P1), pages 146-166.
    9. Christis Katsouris, 2023. "Optimal Estimation Methodologies for Panel Data Regression Models," Papers 2311.03471, arXiv.org, revised Nov 2023.

    More about this item

    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

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