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Counterfactual analysis under partial identification using locally robust refinement
Author(s) -
Canen Nathan,
Song Kyungchul
Publication year - 2021
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.2819
Subject(s) - counterfactual thinking , robustness (evolution) , computer science , set (abstract data type) , econometrics , representation (politics) , focus (optics) , identification (biology) , mathematical optimization , mathematical economics , mathematics , philosophy , chemistry , biochemistry , physics , botany , optics , epistemology , politics , biology , political science , law , gene , programming language
Summary Structural models that admit multiple reduced forms, such as game‐theoretic models with multiple equilibria, pose challenges in practice, especially when parameters are set identified and the identified set is large. In such cases, researchers often choose to focus on a particular subset of equilibria for counterfactual analysis, but this choice can be hard to justify. This paper shows that some parameter values can be more “desirable” than others for counterfactual analysis, even if they are empirically equivalent given the data. In particular, within the identified set, some counterfactual predictions can exhibit more robustness than others against local perturbations of the reduced forms (e.g., the equilibrium selection rule). We provide a representation of this subset, which can be used to simplify the implementation. We illustrate our message using moment inequality models and provide an empirical application based on a model with top coded data.