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Goodness-of-Fit: An Economic Approach

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  • Sanghamitra Bandyopadhyay
  • Frank A Cowell
  • Emmanuel Flachaire

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.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Distributional Analysis Research Programme Papers with number 101.

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Date of creation: Apr 2009
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Handle: RePEc:cep:stidar:101

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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Keywords: goodness of fit; discrepancy; income distribution; inequalitymeasurement;

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  1. Colin Cameron, A. & Windmeijer, Frank A. G., 1997. "An R-squared measure of goodness of fit for some common nonlinear regression models," Journal of Econometrics, Elsevier, vol. 77(2), pages 329-342, April.
  2. Blackorby, Charles & Donaldson, David, 1978. "Measures of relative equality and their meaning in terms of social welfare," Journal of Economic Theory, Elsevier, vol. 18(1), pages 59-80, June.
  3. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  4. Cameron, A.C. & Windmeijer, F.A.G., 1993. "R-Squared Measures for Count Data Regression Models with Applications to Health Care Utilization," Papers 93-24, California Davis - Institute of Governmental Affairs.
  5. Cowell, Frank A., 1980. "Generalized entropy and the measurement of distributional change," European Economic Review, Elsevier, vol. 13(1), pages 147-159, January.
  6. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
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Cited by:
  1. Erik Figueiredo, 2011. "A Note on the Measurement of Unfair Inequality in Brazil," Economics Bulletin, AccessEcon, vol. 31(4), pages 2944-2951.
  2. VAN KERM Philippe & YU Seunghee & CHOE Chung, 2014. "Wage differentials between native, immigrant and cross-border workers: Evidence and model comparisons," CEPS/INSTEAD Working Paper Series 2014-05, CEPS/INSTEAD.

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