There will always be a trade-off between the robustness of the limited-information
procedure (such as 2SLS estimation technique) and the efficiency of the fullinformation
method (such as 3SLS estimation technique). Consequently, it becomes
important to test for possible mis-specification in the model. Thus, as a check for the
internal consistency of the entire system, the Hausman specification test is applied.
Hausman (1978) proposed a test of system specification whereby one compares 2SLS
and 3SLS estimates of the structural parameters of the model rather than the reduced form parameters, of which economists have a very limited know1edge.l No such
specification test has been done to date in studies relating to the savings function