Arellano and Bond (1991) show that, in particular, consistent estimates require the absence of serial correlation in the error term. Accordingly, they provide a test of autocorrelation in the residuals, i.e. a test that the differenced error terms are not second-order serially correlated. Hence, taking first differences eliminates most of the variation in the data, and implies that the lagged levels of the explanatory variables are weak instruments for the variables in differences giving rise to large biases and imprecision (see e.g. Blundell and Bond, 1998, Bond et al.,