Limited information estimation and testing of discretized multivariate normal structural models

Abstract

Discretized multivariate normal structural models are often estimated using multistage estimation procedures. The asymptotic properties of parameter estimates, standard errors, and tests of structural restrictions on thresholds and polychoric correlations are well known. It was not clear how to assess the overall discrepancy between the contingency table and the model for these estimators. It is shown that the overall discrepancy can be decomposed into a distributional discrepancy and a structural discrepancy. A test of the overall model specification is proposed, as well as a test of the distributional specification (i.e., discretized multivariate normality). Also, the small sample performance of overall, distributional, and structural tests, as well as of parameter estimates and standard errors is investigated under conditions of correct model specification and also under mild structural and/or distributional misspecification. It is found that relatively small samples are needed for parameter estimates, standard errors, and structural tests. Larger samples are needed for the distributional and overall tests. Furthermore, parameter estimates, standard errors, and structural tests are surprisingly robust to distributional misspecification.