Working Paper Series, Department of Economics, Uppsala University
No 2002:13:
Power Properties of the Sargan Test in the Presence of Measurement Errors in Dynamic Panels
Matz Dahlberg ()
, Eva Johansson ()
and Per Tovmo
Abstract: This paper investigates the power properties of the Sargan
test in the presence of measurement errors in dynamic panel data models.
The general conclusion from the Monte Carlo simulations is that the Sargan
test, in many cases, leads the econometrician to accept misspecified models
with sometimes severely biased parameter estimates as a result. This is
especially true when the number of cross-sectional units is small and when
there are measurement errors in the dependent variable. To investigate if
the simulation results have any bearing in real applications, we used the
data in Arellano and Bond (1991) and re-estimated their employment
equations with the difference that we deliberately imposed additive and
multiplicative measurement errors in the employment and wage variables. It
turned out that the Sargan test always accepted the misspecified models
while we at the same time ended up with biased parameter estimates. The
conclusion from this paper is that in the very likely case of measurement
errors in either the dependent or any of the independent variables, we
will, if we rely on the Sargan test, quite likely accept a misspecified
model and end up with biased results.
Keywords: Sargan test; Measurement errors; Dynamic panels; (follow links to similar papers)
JEL-Codes: C12; C15; C23; (follow links to similar papers)
20 pages, July 31, 2002
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