Small Sample Improvements of the GEL Robust Tests for Linear IV Models and Applications

Abstract

In order to improve the small sample performance of the Generalized Empirical Likelihood Kleibergen type tests (GELK), we propose to re-weight the variance of moments matrix with GEL probabilities. Our modification improves GELK significantly by cutting the size distortion in half. Using simulations, we compare the performance of our modified tests with Kleibergen's K-test and the original GELK tests in a dynamic panel setting. As an empirical application, we use the Arellano and Bond's dynamic panel data for 140 UK firms to estimate labor demand. We compare our results with the traditionalWald test to illustrate the practical importance of using tests which are robust to weak instruments in a dynamic panel setting.GELK, weak instruments, dynamic panel, empirical likelihood