SPECIFICATION TESTS IN SIMULTANEOUS-EQUATIONS SYSTEMS

This paper makes two contributions: (a) it provides a new derivation o f 2SLS and 3SLS estimators in which they are represented as restricted least squares and restricted generalized least squares, respectively; (b) in the context thus created it provides a perfectly routine and f lexible vehicle for carrying out 'identifiability' and specification t ests utilizing 2SLS or 3SLS estimators. The tests in question are simp le Lagrange multiplier tests (LMT) carried out directly on the prior r estrictions, in contrast to the current literature which approaches th e problem indirectly through tests on the implications of such prior r estrictions on the reduced form. In addition, it provides a limited Mo nte Carlo study comparing the performance of the newly created tests t o that of the Hausman test (HT).