Inequality, Entropy and Goodness of Fit

By: Frank A. Cowell (STICERD – London School of Economics)
Emmanuel Flachaire (GREQAM – Groupement de Recherche en Économie Quantitative d’Aix-Marseille – Université de la Méditerranée – Aix-Marseille II – Université Paul Cézanne – Aix-Marseille III – Ecole des Hautes Etudes en Sciences Sociales (EHESS) – CNRS : UMR6579)
Sanghamitra Bandyopadhyay (STICERD – London School of Economics)
URL: http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00591077&r=ltv
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.
Keywords: goodness of fit; discrepancy; income distribution; inequality measurement
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