Moment Conditions and Neglected Endogeneity in Panel Data Models

This paper develops a new moment condition for estimation of linear panel data models. When added to the set of instruments devised by Anderson, Hsiao (1981, 1982) for the dynamic model, the proposed approach can outperform the GMM methods customarily employed for estimation. The proposal builds on the properties of the iterated GLS, that, contrary to conventional wisdom, can lead to a consistent estimator in particular cases where endogeneity of the explanatory variables is neglected. The targets achieved are a reduction in the number of moment conditions and a better performance over the most widely adopted techniques.