Functional form bias in goodness-of-fit optimizing models
Following the weak axiom of revealed preference (WARP), developed by Varian, a money-metric expenditure function is derived for a CES utility function in this paper. Using the US aggregate data on consumption used by Varian, the money-metric expenditure function is estimated to calculate an efficiency index measuring the magnitude of departure from the optimum expenditures. The results are then compared to those reported by Varian for a Cobb-Douglas utility function. The findings point to a sizeable bias in the calculated efficiency index in the near-optimization analysis as determined by the choice of the functional form.
Year of publication: |
1999
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Authors: | Adrangi, Bahram ; Raffiee, Kambiz |
Published in: |
Applied Economics Letters. - Taylor & Francis Journals, ISSN 1350-4851. - Vol. 6.1999, 1, p. 13-15
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Publisher: |
Taylor & Francis Journals |
Saved in:
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