Optimal transportation and the falsifiability of incompletely specified economic models

TL;DR

This paper introduces a framework using optimal transportation duality to assess the falsifiability of economic models with incomplete specifications, enabling the construction of tests to verify model correctness.

Contribution

It develops a novel approach linking optimal transportation theory to economic model testing, especially when models are under-identified.

Findings

Provides a duality-based method for model falsifiability

Enables operational tests for economic model correctness

Addresses models with insufficient restrictions for identification

Abstract

A general framework is given to analyze the falsifiability of economic models based on a sample of their observable components. It is shown that, when the restrictions implied by the economic theory are insufficient to identify the unknown quantities of the structure, the duality of optimal transportation with zero-one cost function delivers interpretable and operational formulations of the hypothesis of specification correctness from which tests can be constructed to falsify the model.