Likelihood Estimation and Inference in a Class of Nonregular Econometric Models

Econometrica · 2004 · Volume 72 · Issue 5

DOI: 10.1111/j.1468-0262.2004.00540.x

Abstract

We study inference in structural models with a jump in the conditional density, where location and size of the jump are described by regression curves. Two prominent examples are auction models, where the bid density jumps from zero to a positive value at the lowest cost, and equilibrium job-search models, where the wage density jumps from one positive level to another at the reservation wage. General inference in such models remained a long-standing, unresolved problem, primarily due to nonregularities and computational difficulties caused by discontinuous likelihood functions. This paper develops likelihood-based estimation and inference methods for these models, focusing on optimal (Bayes) and maximum likelihood procedures. We derive convergence rates and distribution theory, and develop Bayes and Wald inference. We show that Bayes estimators and confidence intervals are attractive both theoretically and computationally, and that Bayes confidence intervals, based on posterior quantiles, provide a valid large sample inference method.

Keywords

Point process, extreme value theory, Bayes, frequentist validity of posterior, computational complexity, epi-convergence, insufficiency of maximum likelihood

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