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Robust Tests of Model Incompleteness in the Presence of Nuisance Parameters

Shuowen Chen and Hiroaki Kaido

Papers from arXiv.org

Abstract: Economic models may exhibit incompleteness depending on whether or not they admit certain policy-relevant features such as strategic interaction, self-selection, or state dependence. We develop a novel test of model incompleteness and analyze its asymptotic properties. A key observation is that one can identify the least-favorable parametric model that represents the most challenging scenario for detecting local alternatives without knowledge of the selection mechanism. We build a robust test of incompleteness on a score function constructed from such a model. The proposed procedure remains computationally tractable even with nuisance parameters because it suffices to estimate them only under the null hypothesis of model completeness. We illustrate the test by applying it to a market entry model and a triangular model with a set-valued control function.

Date: 2022-08, Revised 2023-09
New Economics Papers: this item is included in nep-ecm
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