Econometric Analysis: Looking at Flexibility in Models

By Roberto Pedace

Part of Econometrics For Dummies Cheat Sheet

You may want to allow your econometric model to have some flexibility, because economic relationships are rarely linear. Many situations are subject to the “law” of diminishing marginal benefits and/or increasing marginal costs, which implies that the impact of the independent variables won’t be constant (linear).

The precise functional form depends on your specific application, but the most common are as follows: