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Misspecified Moment Inequality Models: Inference And Diagnostics, Donald W.K. Andrews, Soonwoo Kwon

Cowles Foundation Discussion Papers

This paper is concerned with possible model misspecification in moment inequality models. Two issues are addressed. First, standard tests and confidence sets for the true parameter in the moment inequality literature are not robust to model misspecification in the sense that they exhibit spurious precision when the identified set is empty. This paper introduces tests and confidence sets that provide correct asymptotic inference for a pseudo-true parameter in such scenarios, and hence, do not suffer from spurious precision. Second, specification tests have relatively low power against a range of misspecified models. Thus, failure to reject the null of correct specification …