Strict Exogeneity

[jmagomez]

Dear Fellows,

Is this paragraph true? Why is the addition of lagged sales violating strict exogeneity? And why is AR(1) not violating strict exogeneity?

"The addition of lagged sales as an independent variable in our setup
violates strict exogeneity, which is an essential assumption of Ordinary
Least-Squares (OLS). In order to overcome this challenge, we follow
Arellano and Bond (1991) and use a generalized method of moments estimator
(GMM) to estimate the fixed effects regression in the Eq. (1).We
instrument previous lags (Si,t – 1) using two sets of different lagged instruments
and we use the J Hansen statistic to verify that our model is not
overspecified."

Equation 1 is attached.

Best Regards, José.