Accuracy and Efficiency of Various GMM Inference Techniques in Dynamic Micro Panel Data Models

Studies employing Arellano-Bond and Blundell-Bond GMM estimation for single linear dynamic panel data models are growing exponentially in number. However, for researchers it is hard to make a reasoned choice between many different possible implementations of these estimators and associated tests. By simulation the effects are examined of many options regarding: (i) reducing, extending or modifying the set of instruments; (ii) specifying the weighting matrix in relation to the type of heteroskedasticity; (iii) using (robustified) 1-step or (corrected) 2-step variance estimators; (iv) employing 1-step or 2-step residuals in Sargan-Hansen overall or incremental overidentification restrictions tests. This is all done for models in which some regressors may be either strictly exogenous, predetermined or endogenous. Surprisingly, particular asymptotically optimal and relatively robust weighting matrices are found to be superior in finite samples to ostensibly more appropriate versions. Most of the variants of tests for overidentification restrictions show serious deficiencies. A recently developed modification of GMM is found to have great potential when the cross-sectional heteroskedasticity is pronounced and the time-series dimension of the sample not too small. Finally all techniques are employed to actual data and lead to some profound insights.