On the flexibility of flexible functional forms: An empirical approach

Abstract

This paper analyzes empirically the ability of the Translog and Generalized Leontief functional forms to approximate Constant Elasticity of Substitution utility functions. Although these flexible forms provide a good local approximation they do not always provide a good approximation over a range of observations. Hence the finding in practice of observations for which the regularity conditions required by economic theory are not satisfied need not imply the absence of an underlying utility-maximizing process, but may simply reflect the inability of the flexible form to approximate the true utility function over the range of the data.