On the local power of some tests of strict exogeneity in linear fixed effects models

Abstract

The local asymptotic power of a variable addition test for strict exogeneity in a linear panel model is derived under near-epoch dependence and a maintained assumption of contemporaneously exogenous regressors. Local power is found to depend nontrivially on the relative panel size, on the width of the local neighborhood, and on the maintained notion of exogeneity under the alternative. Some (dis)similarities between this test and already existing test principles are explored.