Nonparametric instrumental variable estimation under monotonicity

Denis Chetverikov () and Daniel Wilhelm
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Denis Chetverikov: Institute for Fiscal Studies and UCLA

No CWP39/15, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: The ill-posedness of the inverse problem of recovering a regression function in a nonparametric instrumental variable model leads to estimators that may suffer from a very slow, logarithmic rate of convergence. In this paper, we show that restricting the problem to models with monotone regression functions and monotone instruments significantly weakens the ill-posedness of the problem. In stark contrast to the existing literature, the presence of a monotone instrument implies boundedness of our measure of ill-posedness when restricted to the space of monotone functions. Based on this result we derive a novel non-asymptotic error bound for the constrained estimator that imposes monotonicity of the regression function. For a given sample size, the bound is independent of the degree of ill-posedness as long as the regression function is not too steep. As an implication, the bound allows us to show that the constrained estimator converges at a fast, polynomial rate, independently of the degree of ill-posedness, in a large, but slowly shrinking neighborhood of constant functions. Our simulation study demonstrates significant finite-sample performance gains from imposing monotonicity even when the regression function is rather far from being a constant. We apply the constrained estimator to the problem of estimating gasoline demand functions from U.S. data.

Date: 2015-07-13
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Nonparametric instrumental variable estimation under monotonicity (2017)
Working Paper: Nonparametric instrumental variable estimation under monotonicity (2016)
Working Paper: Nonparametric instrumental variable estimation under monotonicity (2015)
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