How Flexible is that Functional Form? Quantifying the Restrictiveness of Theories

65 Pages Posted: 8 Jul 2020 Last revised: 9 May 2022

See all articles by Drew Fudenberg

Drew Fudenberg

Massachusetts Institute of Technology (MIT)

Wayne Yuan Gao

University of Pennsylvania - Department of Economics

Annie Liang

Northwestern University

Date Written: May 8, 2022

Abstract

We propose a new way to quantify the restrictiveness of an economic model, based on how well the model fits synthetic data from a pre-defined class. The restrictiveness measure, together with a measure for how well the model fits real data, outlines a Pareto frontier, where models that rule out more regularities, yet capture the regularities that are present in real data, are preferred. To illustrate our approach, we evaluate the restrictiveness of popular models in two laboratory settings - certainty equivalents and initial play - and in one field setting -takeup of micro finance in Indian villages. The restrictiveness measure reveals new insights about each of the models, including that some economic models with only a few free parameters are very flexible.

Keywords: model flexibility, experimental economics, behavioral economics

JEL Classification: C90, D90, C52

Suggested Citation

Fudenberg, Drew and Gao, Wayne and Liang, Annie, How Flexible is that Functional Form? Quantifying the Restrictiveness of Theories (May 8, 2022). Available at SSRN: https://ssrn.com/abstract=3580408 or http://dx.doi.org/10.2139/ssrn.3580408

Drew Fudenberg

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Wayne Gao (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.waynegao.com

Annie Liang

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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