Hostname: page-component-cb9f654ff-fg9bn Total loading time: 0 Render date: 2025-08-21T07:29:26.103Z Has data issue: false hasContentIssue false

EXTENDING ECONOMIC MODELS WITH TESTABLE ASSUMPTIONS: THEORY AND APPLICATIONS

Published online by Cambridge University Press:  19 August 2025

Moyu Liao*
Affiliation:
https://ror.org/0384j8v12 The University of Sydney
*
Address correspondence to Moyu Liao, School of Economics, The University of Sydney, Sydney, NSW, Australia; email: moyu.liao@sydney.edu.au
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This article studies the identification of complete economic models with testable assumptions. We start with a local average treatment effect ($LATE$) model where the “No Defiers,” the independent IV assumption, and the exclusion restrictions can be jointly refuted by some data distributions. We propose two relaxed assumptions that are not refutable, with one assumption focusing on relaxing the “No Defiers” assumption while the other relaxes the independent IV assumption. The identified set of $LATE$ under either of the two relaxed assumptions coincides with the classical $LATE$ Wald ratio expression whenever the original assumption is not refuted by the observed data distribution. We propose an estimator for the identified $LATE$ and derive the estimator’s limit distribution. We then develop a general method to relax a refutable assumption A. This relaxation method requires finding a function that measures the deviation of an econometric structure from the original assumption A, and a relaxed assumption $\tilde {A}$ is constructed using this measure of deviation. We characterize a condition to ensure the identified sets under $\tilde {A}$ and A coincide whenever A is not refuted by the observed data distribution and discuss the criteria to choose among different relaxed assumptions.

Information

Type
ARTICLES
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NC
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial licence (https://creativecommons.org/licenses/by-nc/4.0), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use.
Copyright
© The Author(s), 2025. Published by Cambridge University Press

Footnotes

I thank the Editor (Peter C. B. Phillips), the Co-Editor (Y.-J. Whang), and two anonymous referees for constructive comments which improve the article substantially. I thank Marc Henry for his invaluable advice and encouragement. I also thank Andres Aradillas-Lopez, Keisuke Hirano, Yu-Chin Hsu, Michael Gechter, Patrik Guggenberger, Sun Jae Jun, and Joris Pinkse for their useful comments. All mistakes are mine.

References

REFERENCES

Aradillas-Lopez, A., & Tamer, E. (2008). The identification power of equilibrium in simple games. Journal of Business & Economic Statistics , 26(3), 261283.10.1198/073500108000000105CrossRefGoogle Scholar
Bonhomme, S., & Weidner, M. (2022). Minimizing sensitivity to model misspecification. Quantitative Economics , 13(3), 907954.10.3982/QE1930CrossRefGoogle Scholar
Bresnahan, T. F., & Reiss, P. C. (1991). Empirical models of discrete games. Journal of Econometrics , 48(1–2), 5781.10.1016/0304-4076(91)90032-9CrossRefGoogle Scholar
Breusch, T. S. (1986). Hypothesis testing in unidentified models. The Review of Economic Studies , 53(4), 635651.10.2307/2297609CrossRefGoogle Scholar
Card, D. (1993). Using geographic variation in college proximity to estimate the return to schooling. NBER Working Paper, 4483.10.3386/w4483CrossRefGoogle Scholar
Christensen, T., & Connault, B. (2023). Counterfactual sensitivity and robustness. Econometrica , 91(1), 263298.10.3982/ECTA17232CrossRefGoogle Scholar
Dahl, C. M., Huber, M., & Mellace, G. (2023). It is never too late: A new look at local average treatment effects with or without defiers. The Econometrics Journal , 26(3), 378404.10.1093/ectj/utad013CrossRefGoogle Scholar
De Chaisemartin, C. (2017). Tolerating defiance? Local average treatment effects without monotonicity. Quantitative Economics , 8(2), 367396.10.3982/QE601CrossRefGoogle Scholar
Galichon, A., & Henry, M. (2011). Set identification in models with multiple equilibria. The Review of Economic Studies , 78(4), 12641298.10.1093/restud/rdr008CrossRefGoogle Scholar
Hansen, L. P., & Sargent, T. J. (2007). Recursive robust estimation and control without commitment. Journal of Economic Theory , 136(1), 127.CrossRefGoogle Scholar
Hansen, L. P., Sargent, T. J., Turmuhambetova, G., & Williams, N. (2006). Robust control and model misspecification. Journal of Economic Theory , 128(1), 4590.10.1016/j.jet.2004.12.006CrossRefGoogle Scholar
Hirano, K., & Porter, J. R. (2012). Impossibility results for nondifferentiable functionals. Econometrica , 80(4), 17691790.Google Scholar
Hsu, Y.-C., Liu, C.-A., & Shi, X. (2019). Testing generalized regression monotonicity. Econometric Theory , 35(6), 11461200.10.1017/S0266466618000439CrossRefGoogle Scholar
Imbens, G. W., & Angrist, J. D. (1994). Identification and estimation of local average treatment effects. Econometrica , 62(2), 467475.CrossRefGoogle Scholar
Jovanovic, B. (1989). Observable implications of models with multiple equilibria. Econometrica , 57(6), 14311437.10.2307/1913714CrossRefGoogle Scholar
Kedagni, D. (2019). Identification of treatment effects with mismeasured imperfect instruments. Available at SSRN 3388373.10.2139/ssrn.3388373CrossRefGoogle Scholar
Kitagawa, T. (2015). A test for instrument validity. Econometrica , 83(5), 20432063.10.3982/ECTA11974CrossRefGoogle Scholar
Kitagawa, T. (2021). The identification region of the potential outcome distributions under instrument independence. Journal of Econometrics , 225(2), 231253.10.1016/j.jeconom.2021.03.006CrossRefGoogle Scholar
Koopmans, T. C., & Reiersol, O. (1950). The identification of structural characteristics. The Annals of Mathematical Statistics , 21(2), 165181.CrossRefGoogle Scholar
Liao, M. (2024). Robust Bayesian method for refutable models. Working Paper. arXiv preprint, arXiv:2401.04512.Google Scholar
Manski, C. F., & Pepper, J. V. (2000). Monotone instrumental variables: With an application to the returns to schooling. Econometrica , 68(4), 9971010.10.1111/1468-0262.00144CrossRefGoogle Scholar
Masten, M. A., & Poirier, A. (2021). Salvaging falsified instrumental variable models. Econometrica , 89(3), 14491469.10.3982/ECTA17969CrossRefGoogle Scholar
Mourifié, I., Henry, M., & Méango, R. (2020). Sharp bounds and testability of a Roy model of STEM major choices. Journal of Political Economy 128(8), 32203283.10.1086/708724CrossRefGoogle Scholar
Mourifié, I., & Wan, Y. (2017). Testing local average treatment effect assumptions. Review of Economics and Statistics , 99(2), 305313.10.1162/REST_a_00622CrossRefGoogle Scholar
Popper, K. (2005). The logic of scientific discovery . Routledge.10.4324/9780203994627CrossRefGoogle Scholar
Roy, A. D. (1951). Some thoughts on the distribution of earnings. Oxford Economic Papers , 3(2), 135146.10.1093/oxfordjournals.oep.a041827CrossRefGoogle Scholar
Rubin, D. B. (1974). Estimating causal effects of treatments in randomized and nonrandomized studies. Journal of Educational Psychology , 66(5), 688.CrossRefGoogle Scholar
Tamer, E. (2003). Incomplete simultaneous discrete response model with multiple equilibria. The Review of Economic Studies , 70(1), 147165.CrossRefGoogle Scholar
Supplementary material: File

Liao supplementary material

Liao supplementary material
Download Liao supplementary material(File)
File 429.2 KB