Misspecified Moment Inequality Models: Inference and Diagnostics

Authors

Donald W.K. Andrews
Soonwoo Kwon

Document Type

Discussion Paper

Publication Date

7-2019

CFDP Number

2184R2

CFDP Revision Date

7-29-2022

CFDP Pages

45

Journal of Economic Literature (JEL) Code(s)

C10, C12

Abstract

This paper is concerned with possible model misspecification in moment inequality models. Two issues are addressed. First, standard tests and confidence sets for the true parameter in the moment inequality literature are not robust to model misspecification in the sense that they exhibit spurious precision when the identified set is empty. This paper introduces tests and confidence sets that provide correct asymptotic inference for a pseudo-true parameter in such scenarios, and hence, do not suffer from spurious precision. Second, specification tests have relatively low power against a range of misspecified models. Thus, failure to reject the null of correct specification does not necessarily provide evidence of correct specification. That is, model specification tests are subject to the problem that absence of evidence is not evidence of absence. This paper develops new diagnostics for model misspecification in moment inequality models that do not suffer from this problem.

Recommended Citation

Andrews, Donald W.K. and Kwon, Soonwoo, "Misspecified Moment Inequality Models: Inference and Diagnostics" (2019). Cowles Foundation Discussion Papers. 2706.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2706