Discriminating between (in)valid external instruments and (in)valid exclusion restrictions

Jan Kiviet

No 15-04, UvA-Econometrics Working Papers from Universiteit van Amsterdam, Dept. of Econometrics

Abstract: In models estimated by (generalized) method of moments a test of coefficient restrictions can either be based on a Wald statistic or on the difference between evaluated criterion functions. Their correspondence can be used to demonstrate that a Sargan-Hansen test statistic for overidentification restrictions is equivalent to an omitted variables test statistic for a nonunique group of variables. We prove that this is the case for incremental Sargan-Hansen tests too. However, we also demonstrate that, despite this equivalence, one can nevertheless distinguish between either the (in)validity of some additional instruments or the (un)tenability of particular exclusion restrictions. It all hinges upon the required choice made regarding the initial maintained hypothesis.

Date: 2015-11-26
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Related works:
Journal Article: Discriminating between (in)valid External Instruments and (in)valid Exclusion Restrictions (2017)
Working Paper: Discriminating between (in)valid external instruments and (in)valid exclusion restrictions (2016)
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