Working Paper

Testing for a general class of functional inequalities

Authors

Sokbae (Simon) Lee, Kyungchui (Kevin) Song, Yoon-Jae Whang

Published Date

6 March 2014

Type

Working Paper (CWP09/14)

In this paper, we propose a general method for testing inequality restrictions on nonparametric functions. Our framework includes many nonparametric testing problems in a unied framework, with a number of possible applications in auction models, game theoretic models, wage inequality, and revealed preferences. Our test involves a one-sided version of Lp functionals of kernel-type estimators (1 < p < ∞) and is easy to implement in general, mainly due to its recourse to the bootstrap method. The bootstrap procedure is based on nonparametric bootstrap applied to kernel-based test statistics, with estimated "contact sets". We provide regularity conditions under which the bootstrap test is asymptotically valid uniformly over a large class of distributions, including the cases that the limiting distribution of the test statistic is degenerate. Our bootstrap test is shown to exhibit good power properties in Monte Carlo experiments, and we provide a general form of the local power function. As an illustration, we consider testing implications from auction theory, provide primitive conditions for our test, and demonstrate its usefulness by applying our test to real data. We supplement this example with the second empirical illustration in the context of wage inequality.