On the relevance of weaker instruments

Bertille Antoine and Eric Renault

Econometric Reviews, 2017, vol. 36, issue 6-9, 928-945

Abstract: We study the asymptotic properties of the standard GMM estimator when additional moment restrictions, weaker than the original ones, are available. We provide conditions under which these additional weaker restrictions improve the efficiency of the GMM estimator. To detect “spurious” identification that may come from invalid moments, we rely on the Hansen J-test that assesses the compatibility between existing restrictions and additional ones. Our simulations reveal that the J-test has good power properties and that its power increases with the weakness of the additional restrictions. Our theoretical characterization of the J-test provides some intuition for why that is.

Date: 2017
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Working Paper: On the relevance of weaker instruments (2016)
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DOI: 10.1080/07474938.2017.1307598

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