Specification Testing in Panel Data with Instrumental Variables

24 Pages Posted: 4 Jul 2004

See all articles by Gilbert E. Metcalf

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1996

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.

Suggested Citation

Metcalf, Gilbert E., Specification Testing in Panel Data with Instrumental Variables (June 1996). NBER Working Paper No. t0123. Available at SSRN: https://ssrn.com/abstract=274545

Gilbert E. Metcalf (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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