Likelihood Inference in a Class of Nonregular Econometric Models

42 Pages Posted: 22 Feb 2002

See all articles by Victor Chernozhukov

Victor Chernozhukov

Massachusetts Institute of Technology (MIT) - Department of Economics

Han Hong

Independent

Date Written: February 2002

Abstract

In this paper we study inference for a conditional model with a jump in the conditional density, where the location and size of the jump are described by regression lines. This interesting structure is shared by several structural econometric models. Two prominent examples are the standard auction model where density jumps from zero to a positive value, and the equilibrium job search model, where the density jumps from one level to another, inducing kinks in the cumulative distribution function. This paper develops the asymptotic inference theory for likelihood based estimators of these models - the Bayes and maximum likelihood estimators. Bayes and ML estimators are useful classical procedures. While MLE is transformation invariant, Bayes estimators offer some theoretic and computational advantages. They also have desirable efficiency properties. We characterize the limit likelihood as a function of a Poisson process that tracks the near-to-jump events and depends on regressors. The approach is applied to an empirical model of a highway procurement auction. We estimated a pareto model of Paarsch (1992) and an alternative flexible parametric model.

Keywords: Extreme Value Theory, Structural Econometric Model, Auctions, Job Search, Highway Procurement Auction, Likelihood, Point Process, Stochastic Equisemicontinuity

JEL Classification: C13, C51, C53, D44, D11, D21

Suggested Citation

Chernozhukov, Victor and Hong, Han, Likelihood Inference in a Class of Nonregular Econometric Models (February 2002). Available at SSRN: https://ssrn.com/abstract=301486 or http://dx.doi.org/10.2139/ssrn.301486

Victor Chernozhukov (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Han Hong

Independent