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Goodness-of-Fit: An Economic Approach

  • Sanghamitra Bandyopadhyay
  • Frank A. Cowell

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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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper444.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 444.

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Date of creation: 01 Aug 2009
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Handle: RePEc:oxf:wpaper:444
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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. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  4. Cameron, A Colin & Windmeijer, Frank A G, 1996. "R-Squared Measures for Count Data Regression Models with Applications to Health-Care Utilization," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(2), pages 209-20, April.
  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. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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