Power properties of the Sargan test in the presence of measurement errors in dynamic panels

Matz Dahlberg, Eva Mörk and Per Tovmo

Applied Economics Letters, 2008, vol. 15, issue 5, pages 349-353

Abstract: This article investigates the power properties of the Sargan test in the presence of measurement errors in dynamic panel data models. The conclusion from Monte Carlo (MC) simulations and an application on the data used by Arellano and Bond (1991), 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.

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