Monte Carlo Confidence Sets for Identified Sets

TL;DR

This paper introduces Monte Carlo-based confidence sets for identified parameters in complex models, ensuring accurate coverage even in non-regular or boundary cases, with demonstrated finite-sample effectiveness and real-world applications.

Contribution

It develops computationally feasible confidence set procedures using Monte Carlo simulations for partially-identified models, with new theoretical guarantees and empirical validation.

Findings

Exact asymptotic coverage in regular models

Valid but conservative coverage in boundary models

Good finite-sample performance in simulations

Abstract

In complicated/nonlinear parametric models, it is generally hard to know whether the model parameters are point identified. We provide computationally attractive procedures to construct confidence sets (CSs) for identified sets of full parameters and of subvectors in models defined through a likelihood or a vector of moment equalities or inequalities. These CSs are based on level sets of optimal sample criterion functions (such as likelihood or optimally-weighted or continuously-updated GMM criterions). The level sets are constructed using cutoffs that are computed via Monte Carlo (MC) simulations directly from the quasi-posterior distributions of the criterions. We establish new Bernstein-von Mises (or Bayesian Wilks) type theorems for the quasi-posterior distributions of the quasi-likelihood ratio (QLR) and profile QLR in partially-identified regular models and some non-regular models. These results imply that our MC CSs have exact asymptotic frequentist coverage for identified sets of full parameters and of subvectors in partially-identified regular models, and have valid but potentially conservative coverage in models with reduced-form parameters on the boundary. Our MC CSs for identified sets of subvectors are shown to have exact asymptotic coverage in models with singularities. We also provide results on uniform validity of our CSs over classes of DGPs that include point and partially identified models. We demonstrate good finite-sample coverage properties of our procedures in two simulation experiments. Finally, our procedures are applied to two non-trivial empirical examples: an airline entry game and a model of trade flows.