Sebastian Kripfganz

Senior Lecturer (advanced assistant professor) in Econometrics,
University of Exeter Business School, Department of Economics

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Title and Abstract
Instrument approval by the Sargan test and its consequences for coefficient estimation
Empirical econometric findings are often vindicated by supplementing them with the p-values of Sargan-Hansen tests for overidentifying restrictions, provided these exceed a chosen small nominal significance level. It is illustrated here that the probability that such tests reject instrument validity may often barely exceed small levels, even when instruments are seriously invalid, whereas even minor invalidity of instruments can severely undermine inference on regression coefficients by instrumental variable estimators. These uncomfortable patterns may be aggravated when particular valid or invalid instruments are relatively weak or strong.
Suggested Citation
Kiviet, J. F., and S. Kripfganz (2021). Instrument approval by the Sargan test and its consequences for coefficient estimation. Economics Letters 205, 109935.
Related Work
Kripfganz, S., and J. F. Kiviet (2021). kinkyreg: Instrument-free inference for linear regression models with endogenous regressors. Stata Journal 21 (3), 772-813.
Jan F. Kiviet
University of Amsterdam;
Stellenbosch University
Sebastian Kripfganz
University of Exeter
Journal Article
Economics Letters 205, 109935
Article DOI
Online appendix