Define model specification.

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Key Concepts

Specification Error

Specification error arises when the model does not correctly represent the underlying reality, often due to missing key variables, inclusion of irrelevant variables, or incorrect functional form. Such errors can lead to biased or inconsistent estimates, ultimately undermining the model's validity and the reliability of any inferential conclusions drawn from it.

Model Specification

Model specification refers to the process of selecting and arranging the independent variables, functional forms, and relationships in order to build a theoretical model that accurately reflects the phenomena under study. It involves determining which variables should be included or excluded, as well as the mathematical form that best captures the assumed causal or descriptive relationships between them.

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