Goodness-of-Fit: An Economic Approach

31 Pages Posted: 8 Feb 2010

See all articles by Sanghamitra Bandyopadhyay

Sanghamitra Bandyopadhyay

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Frank Cowell

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Emmanuel Flachaire

Aix-Marseille University

Date Written: April 2009

Abstract

Specific functional forms are often used in economic models of distributions; goodness-of-fit measures are used to assess whether a functional form is appropriate in the light of real-world data. Standard approaches use a distance criterion based on the EDF, an aggregation of differences in observed and theoretical cumulative frequencies. However, an economic approach to the problem should involve a measure of the information loss from using a badly-fitting model. This would involve an aggregation of, for example, individual income discrepancies between model and data. We provide an axiomatisation of an approach and applications to illustrate its importance.

JEL Classification: D63, C10

Suggested Citation

Bandyopadhyay, Sanghamitra and Cowell, Frank A. and Flachaire, Emmanuel, Goodness-of-Fit: An Economic Approach (April 2009). LSE STICERD Research Paper No. DARP101. Available at SSRN: https://ssrn.com/abstract=1547616

Sanghamitra Bandyopadhyay (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Frank A. Cowell

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)171-955 7277 (Phone)
+44 (0)171-242 2357 (Fax)

Emmanuel Flachaire

Aix-Marseille University ( email )

3 Avenue Robert Schuman,
France

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