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 appropriatein the light of real-world data. Standard approaches use a distance criterion based onthe EDF, an aggregation of differences in observed and theoretical cumulativefrequencies. However, an economic approach to the problem should involve ameasure of the information loss from using a badly-fitting model. This would involvean aggregation of, for example, individual income discrepancies between model anddata. We provide an axiomatisation of an approach and applications to illustrate itsimportance.[...]