A practical test for strict exogeneity in linear panel data models with fixed effects

- We provide a practical test for strict exogeneity in linear panel data models with fixed effects when N is large and T is fixed.
- We establish the asymptotic theory of the test, propose a bootstrap procedure for the test and justify its validity.
- Simulations are conducted for our proposed test in comparison with Wooldridge's Wald test.

This paper provides a practical test for strict exogeneity in linear panel data models with fixed effects when the number of individuals N goes to infinity while the number of time periods T is fixed. The test is based on the supremum of a sequence of Wald test statistics. Under suitable conditions, we establish the asymptotic distribution of the test statistic and consistency of the test. A bootstrap procedure is proposed to improve the finite sample performance and the validity of the procedure is justified. We investigate the finite sample performance of the test via a small set of Monte Carlo simulations.