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A testable model of consumption with externalities

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  • Deb, Rahul

Abstract

This paper presents a nonparametric model of interdependent preferences, where an individual's consumption may act as an externality on the preferences of other consumers. We assume that individual price consumption data is observed for all consumers. It is known that the general consumption model with externalities imposes few restrictions on the observed data, where the consistency requirement is Nash rationalizability. We motivate potential games as an important sub class of games where the family of concave potential games is refutable and imposes stronger restrictions on observed data. We use this framework to extend the analysis of Brown and Matzkin [D. Brown, R. Matzkin, Testable restrictions on the equilibrium manifold, Econometrica 64 (1996) 1249-1262] on refutable pure exchange economies to pure exchange economies with externalities. Finally, we discuss an application of this model to inter-household consumption data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 4 (July)
Pages: 1804-1816

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:4:p:1804-1816

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Potential games Externalities Nonparametric restrictions Revealed preference Household consumption Nash-Walras equilibrium;

References

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  1. Ghosal, S. & Polemarchakis, H. M., 1997. "Nash-Walras equilibria," Research in Economics, Elsevier, vol. 51(1), pages 31-40, April.
  2. Brown, Donald J & Matzkin, Rosa L, 1996. "Testable Restrictions on the Equilibrium Manifold," Econometrica, Econometric Society, vol. 64(6), pages 1249-62, November.
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  8. Ed Hopkins & Tatiana Kornienko, 2004. "Running to Keep in the Same Place: Consumer Choice as a Game of Status," ESE Discussion Papers 92, Edinburgh School of Economics, University of Edinburgh.
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  14. Pollak, Robert A, 1976. "Interdependent Preferences," American Economic Review, American Economic Association, vol. 66(3), pages 309-20, June.
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  17. Snyder, Susan K., 1999. "Testable restrictions of Pareto optimal public good provision," Journal of Public Economics, Elsevier, vol. 71(1), pages 97-119, January.
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Cited by:
  1. Finn Christensen, 2014. "Demand with Consumption Externalities," Working Papers 2014-02, Towson University, Department of Economics, revised Apr 2014.
  2. Deb, Rahul & Fenske, James, 2009. "A Nonparametric Test of Strategic Behavior in the Cournot Model," MPRA Paper 16560, University Library of Munich, Germany.
  3. Indra Ray & Susan Snyder, 2003. "Observable Implications of Nash and Subgame-Perfect Behavior in Extensive Games," Working Papers 2003-02, Brown University, Department of Economics.
  4. Laurens CHERCHYE & Thomas DEMUYNCK & Bram DE ROCK, 2009. "Testable implications of general equilibrium models: an integer programming approach," Center for Economic Studies - Discussion papers ces09.14, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  5. Jeremy T. Fox & Natalia Lazzati, 2012. "Identification of Potential Games and Demand Models for Bundles," NBER Working Papers 18155, National Bureau of Economic Research, Inc.

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