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How Demanding Is the Revealed Preference Approach to Demand?

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  • Timothy K. M. Beatty
  • Ian A. Crawford

Abstract

A well-known problem with revealed preference methods is that when data are found to satisfy their restrictions it is hard to know whether this should be viewed as a triumph for economic theory, or a warning that these conditions are so undemanding that almost anything goes. This paper allows researchers to make this distinction. Our approach uses an axiomatic characterization of a measure of predictive success due to Selten (1991). We illustrate the idea using a panel dataset. The results show that this approach can lead us to radically reassess our view of the empirical performance of economic theory. (JEL D11, D12)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.6.2782
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 6 (October)
Pages: 2782-95

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2782-95

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References

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  1. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2007. "The Collective Model of Household Consumption: A nonparametric characterization," ULB Institutional Repository 2013/98559, ULB -- Universite Libre de Bruxelles.
  2. Aizcorbe, Ana M, 1991. "A Lower Bound for the Power of Nonparametric Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 463-67, October.
  3. Bronars, Stephen G, 1987. "The Power of Nonparametric Tests of Preference Maximization [The Nonparametric Approach to Demand Analysis]," Econometrica, Econometric Society, vol. 55(3), pages 693-98, May.
  4. Laura Blow & Martin Browning & Ian Crawford, 2005. "Revealed preference analysis of characteristics models," CAM Working Papers 2005-04, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  5. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  6. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  7. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
  8. Sippel, Reinhard, 1997. "An Experiment on the Pure Theory of Consumer's Behaviour," Economic Journal, Royal Economic Society, vol. 107(444), pages 1431-44, September.
  9. M. Keith Chen & Venkat Lakshminarayanan & Laurie R. Santos, 2006. "How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 517-537, June.
  10. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  11. Famulari, Melissa, 1995. "A Household-Based, Nonparametric Test of Demand Theory," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 372-82, May.
  12. Diewert, W E, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 419-25, July.
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Citations

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Cited by:
  1. Jose Apesteguia & Miguel Angel Ballester, 2010. "A Measure of Rationality and Welfare," Working Papers 467, Barcelona Graduate School of Economics.
  2. Jose Apesteguia & Miguel Angel Ballester, 2012. "Choice By Sequential Procedures," Working Papers 615, Barcelona Graduate School of Economics.
  3. Laurens CHERCHYE & Ian CRAWFORD & Bram DE ROCK & Frederic VERMEULEN, 2011. "Aggregation without the aggravation? Nonparametric analysis of the representative consumer," Center for Economic Studies - Discussion papers ces11.36, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  4. Matthew Polisson, 2012. "Goods versus characteristics: dimension reduction and revealed preference," IFS Working Papers W12/02, Institute for Fiscal Studies.
  5. Deb, Rahul & Pai, Mallesh M., 2014. "The geometry of revealed preference," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 203-207.
  6. Laurens CHERCHYE & Bram DE ROCK & Jeroen SABBE & Ewout VERRIEST, 2010. "Commitment in intertemporal household consumption: a revealed preference analysis," Center for Economic Studies - Discussion papers ces10.33, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  7. Matthew Polisson, 2011. "Goods Versus Characteristics: Revealed Preference Procedures for Nested Models," Economics Series Working Papers 531, University of Oxford, Department of Economics.
  8. Hjertstrand, Per & L. Swofford, James & Whitney, Gerald A., 2013. "Revealed Preference Tests of Utility Maximization and Weak Separability of Consumption, Leisure and Money with Incomplete Adjustment," Working Paper Series 971, Research Institute of Industrial Economics.
  9. Thomas Demuynck & Ewout Verriest, 2013. "I’Ll Never Forget My First Cigarette: A Revealed Preference Analysis Of The “Habits As Durables” Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(2), pages 717-738, 05.
  10. Abi Adams, 2012. "Consume Now or Later? Time Inconsistency, Collective Choice and Revealed Preference," Economics Series Working Papers 625, University of Oxford, Department of Economics.
  11. Mark Dean & Daniel Martin, 2011. "Testing for Rationality with Consumption Data: Demographics and Heterogeneity," Working Papers 2011-11, Brown University, Department of Economics.

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