Instrumental variable models for discrete outcomes are set, not point, identifying. The paper characterises identified sets of structural functions when endogenous variables are discrete. Identified sets are unions of large numbers of convex sets and may not be convex nor even connected. Each of the component sets is a projection of a convex set that resides in a much higher dimensional space onto the space in which a structural function resides. The paper develops a symbolic expression for this projection and gives a constructive demonstration that it is indeed the identified set. We provide a MathematicaTM notebook which computes the set symbolically. We derive properties of the set, suggest how the set can be used in practical econometric analysis when outcomes and endogenous variables are discrete and propose a method for estimating identified sets under parametric or shape restrictions. We develop an expression for a set of structural functions for the case in which endogenous variables are continuous or mixed discrete-continuous and show that this set contains all structural functions in the identified set in the non-discrete case.
18 May 2010
Working Paper (CWP11/10)