Symmetrically normalized instrumental-variable estimation using panel data

Abstract

In this paper we discuss the estimation of panel data models with sequential moment restrictions using symmetrically normalized GMM estimators. These estimators are asymptotically equivalent to standard GMM but are invariant to normalization and tend to have a smaller finite sample bias. They also have a very different behaviour compared to standard GMM when the instruments are poor. We study the properties of SN-GMM estimators in relation to GMM, minimum distance and pseudo maximum likelihood estimators for various versions of the AR(1) model with individual effects by mean of simulations. The emphasis is not in assessing the value of enforcing particular restrictions in the model; rather, we wish to evaluate the effects in small samples of using alternative estimating criteria that produce asymptotically equivalent estimators for fixed T and large N. Finally, as an empírical illustration, we estimate by SN-GMM employment and wage equations using panels of UK and Spanish firms.