Choosing appropriate functional forms is a crucial task for empirical economists in model building. Unfavorable estimation results are usually generated from functions which are not suitable for the characteristics implied by sampling data. The growing number of available functional forms provide model builders not only a wider set to choose from but also complication in selection. Recently, the notion of flexibilty has become the principle of explicitly choosing for functional forms. Although selection criteria based on mathematical, statistical, and theoretical properties have been proposed by numerous studies, they are very difficult to implement for lack of integration.
This study provided a sequential selection process for empirical model building in which three empirical criteria: (1) Monte Carlo experiments; (2) nested hypothesis testing; (3) nonnested hypothesis testing, as well as a theoretical criterion, (4) maintained hypothesis test are combined. An empirical example of choosing production functional form for Taiwan's rice industry was also provided in this paper. Twelve functions consisting the most traditional and locally flexible forms were compared based on the criteria suggested above.
The modified resistance, translog, and generalized Cobb-Douglas forms were found to fit the rice production data better than others as judged by emprical selection criteria. To determine which form is superior, theoretical properties of production were then taken into consideration. The test results showed that both generalized Cobb-Douglas and translog were consistent with the homothetic hypothesis, while only the generalized Cobb-Douglas met the conditions of homogeneity.
