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Structural Estimation Under Misspecification: Theory and Implications for Practice

Author

Listed:
  • Isaiah Andrews
  • Nano Barahona
  • Matthew Gentzkow
  • Ashesh Rambachan
  • Jesse M. Shapiro
Abstract
A researcher can use a tightly parameterized structural model to obtain internally consistent estimates of a wide range of economically interesting targets. We ask how reliable these estimates are when the researcher’s model may be misspecified. We focus on the case of multivariate, potentially nonlinear models where the causal variable of interest is endogenous. Reliable estimates require that the researcher’s model is flexible enough to describe the effects of the endogenous variable approximately correctly. Reliable estimates do not require that the researcher has correctly specified the role of the exogenous controls in the model. However, if the role of the controls is misspecified, reliable estimates require a property we call strong exclusion. Strong exclusion depends on having sufficiently many instruments that are unrelated to the controls. We discuss how practitioners can achieve strong exclusion and illustrate our findings with an application to a differentiated goods model of demand for beer.

Suggested Citation

  • Isaiah Andrews & Nano Barahona & Matthew Gentzkow & Ashesh Rambachan & Jesse M. Shapiro, 2023. "Structural Estimation Under Misspecification: Theory and Implications for Practice," NBER Working Papers 31799, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31799
    Note: IO TWP
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    Cited by:

    1. Cody Cook & Pearl Z. Li & Ariel J. Binder, 2023. "Where to Build Affordable Housing? Evaluating the Tradeoffs of Location," Working Papers 23-62, Center for Economic Studies, U.S. Census Bureau.

    More about this item

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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