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DARP Paper
Goodness-of-Fit: An Economic Approach
Frank A Cowell, Emmanuel Flachaire and Sanghamitra Bandyopadhyay
April 2009
Paper No' DARP 101:
Full Paper (pdf)

JEL Classification: D63; C10

Tags: goodness of fit; discrepancy; income distribution; inequality measurement

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.