An Alternative System GMM Estimation in Dynamic Panel Models
The system GMM estimator in dynamic panel data models which combines two moment conditions, i.e., for the differenced equation and for the model in levels, is known to be more efficient than the first-difference GMM estimator. However, an initial optimal weight matrix is not known for the system estimation procedure. Therefore, we suggest the use of 'a suboptimal weight matrix' which may reduce the finite sample bias whilst increasing its efficiency. Using the Kantorovich inequality, we find that the potential efficiency gain becomes large when the variance of individual effects increases compared to the variance of the idiosyncratic errors. (Our Monte Carlo experiments show that the small sample properties of the suboptimal system estimator are shown to be much more reliable than any other conventional system GMM estimator in terms of bias and efficiency.
|Date of creation:||Jul 2007|
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- Alonso-Borrego, César & Sánchez Mangas, Rocío, 2001. "GMM estimation of a production function with panel data : an application to Spanish manufacturing firms," DES - Working Papers. Statistics and Econometrics. WS ws015527, Universidad Carlos III de Madrid. Departamento de Estadística.
- Kazuhiko Hayakawa, 2005.
"Small Sample Bias Propreties of the System GMM Estimator in Dynamic Panel Data Models,"
Hi-Stat Discussion Paper Series
d05-82, Institute of Economic Research, Hitotsubashi University.
- Hayakawa, Kazuhiko, 2007. "Small sample bias properties of the system GMM estimator in dynamic panel data models," Economics Letters, Elsevier, vol. 95(1), pages 32-38, April.
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