Discordant relaxations of misspecified models

Lixiong Li, Desire Kedagni and Ismaël Mourifié

Quantitative Economics, 2024, vol. 15, issue 2, 331-379

Abstract: In many set‐identified models, it is difficult to obtain a tractable characterization of the identified set. Therefore, researchers often rely on nonsharp identification conditions, and empirical results are often based on an outer set of the identified set. This practice is often viewed as conservative yet valid because an outer set is always a superset of the identified set. However, this paper shows that when the model is refuted by the data, two sets of nonsharp identification conditions derived from the same model could lead to disjoint outer sets and conflicting empirical results. We provide a sufficient condition for the existence of such discordancy, which covers models characterized by conditional moment inequalities and the Artstein (1983) inequalities. We also derive sufficient conditions for the nonexistence of discordant submodels, therefore providing a class of models for which constructing outer sets cannot lead to misleading interpretations. In the case of discordancy, we follow Masten and Poirier (2021) by developing a method to salvage misspecified models, but unlike them, we focus on discrete relaxations. We consider all minimum relaxations of a refuted model that restores data consistency. We find that the union of the identified sets of these minimum relaxations is robust to detectable misspecifications and has an intuitive empirical interpretation.

Date: 2024
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https://doi.org/10.3982/QE1960

Related works:
Working Paper: Discordant Relaxations of Misspecified Models (2024)
Working Paper: Discordant Relaxations of Misspecified Models (2021)
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