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Discussion Paper

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In this paper, we propose an instrumental variable approach to constructing confidence sets (CS’s) for the true parameter in models defined by conditional moment inequalities/equalities. We show that by properly choosing instrument functions, one can transform conditional moment inequalities/equalities into unconditional ones without losing identification power. Based on the unconditional moment inequalities/equalities, we construct CS’s by inverting Cramér–von Mises-type or Kolmogorov–Smirnov-type tests. Critical values are obtained using generalized moment selection (GMS) procedures. We show that the proposed CS’s have correct uniform asymptotic coverage probabilities. New methods are required to establish these results because an infinite-dimensional nuisance parameter affects the asymptotic distributions. We show that the tests considered are consistent against all fixed alternatives and have power against some n –1/2 -local alternatives, though not all such alternatives. Monte Carlo simulations for three different models show that the methods perform well in finite samples.

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