How Flexible is that Functional Form?: Measuring the Restrictiveness of Theories

Abstract

We propose a new way to quantify the restrictiveness of an economic model, based on how well the model fits simulated, hypothetical data sets. The data sets are drawn at random from a distribution that satisfies some application-dependent content restrictions (such as that people prefer more money to less). Models that can fit almost all hypothetical data well are not restrictive. To illustrate our approach, we evaluate the restrictiveness of popular behavioral models in two experimental settings---certainty equivalents and initial play---and explain how restrictiveness reveals new insights about each of the models.