Functional form bias in goodness-of-fit optimizing models

Bahram Adrangi and Kambiz Raffiee

Applied Economics Letters, 1999, vol. 6, issue 1, 13-15

Abstract: 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.

Date: 1999
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DOI: 10.1080/135048599353799

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