Goodness-of-Fit: An Economic Approach
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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