Working Paper: NBER ID: w19486
Authors: Michael J. Dickstein; Eduardo Morales
Abstract: Many economic decisions involve a binary choice - for example, when consumers decide to purchase a good or when firms decide to enter a new market. In such settings, agents' choices often depend on imperfect expectations of the future payoffs from their decision (expectational error) as well as factors that the econometrician does not observe (structural error). In this paper, we show that expectational error, under an assumption of rational expectations, is a source of classical measurement error, and we propose a novel moment inequality estimator that accounts for both expectational error and structural error in a binary choice model. With simulated data and Chilean firm-level customs data, we illustrate the identifying power of our inequalities and show the biases that arise when one ignores either source of error. We use the customs data to estimate the fixed costs exporters face when entering a new market.
Keywords: expectational error; structural error; binary choice; moment inequalities; parameter estimation
JEL Codes: C14; C25; F14; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expectational error (D84) | biases in the estimation of binary choice parameters (C25) |
| ignoring expectational errors (C52) | underpredict the number of exporters in nearby countries (F14) |
| ignoring expectational errors (C52) | overpredict entry in more distant countries (F17) |
| expectational error (D84) | underpredicted probability of entry for large firms (L25) |
| moment inequality estimators (C51) | more accurate bounds for the unknown parameter vector (C51) |
| variance of expectational error (C51) | size of the identified set (C55) |
| larger variances (C29) | broader parameter estimates (C13) |
| moment inequalities (C32) | larger identified sets compared to revealed preference inequalities (D11) |
| identified sets from moment inequalities (C20) | more robust estimates of fixed costs of exporting (F12) |