Indirect inference in incomplete and partially identified econometric models

Lixiong Li and Marc Henry

Papers from arXiv.org

Abstract: We extend the indirect inference principle to structural econometric models that are incomplete, in the sense that a single value of the structural parameter may be compatible with multiple distributions of the observed endogenous variables, so that the structural parameter is typically only partially identified. We define the binding function as the smallest norm of the auxiliary estimating equations over the set of data generating processes compatible with the structural model. Hence, we obtain a confidence region by inverting a test of the hypothesis that the binding function vanishes at the pseudo-true value. A dual characterization based on random set theory makes the binding function computationally tractable. We define the auxiliary model conditionally on the covariates to remove its dependence on the unknown covariate distribution and we show that the binding function is Lipschitz and Hadamard directionally differentiable, so that the numerical delta method delivers valid critical values. We show that the method provides significant computational advantages without relinquishing informativeness in a simulation experiment based on an entry game with 100 potential entrants.

Date: 2026-10
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