On testing overidentifying restrictions in dynamic panel data models

Abstract

The effect of varying the number of moment conditions used on the finite sample properties of the Sargan test of overidentifying restrictions is investigated in the context of dynamic panel data models. The use of too many moment conditions causes the test to be undersized and to have extremely low power. Interestingly, the Exponential Tilting Parameter test is found generally to possess worse size properties than the Sargan test in this context.