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A caveat for the application of the critical cost efficiency index in induced budget experiments

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  • James Murphy
  • Samiran Banerjee

Abstract

Afriat’s (Int Econ Rev 14(2): 460–472, 1973 ) critical cost efficiency index is often used to measure the extent to which experimental choice data violate the axioms of revealed preference. Under certain conditions, the index yields a value of one—which typically signifies rational choice—when, in fact, the choice violates the axioms. We term this a cost efficient violation (CEV) of the axioms, clarify the conditions under which it arises, and find that CEVs comprise the majority of violations in three of four studies reviewed. We suggest changes in experiment design to eliminate or reduce the likelihood of CEVs. Copyright Economic Science Association 2015

Suggested Citation

  • James Murphy & Samiran Banerjee, 2015. "A caveat for the application of the critical cost efficiency index in induced budget experiments," Experimental Economics, Springer;Economic Science Association, vol. 18(3), pages 356-365, September.
    • Handle: RePEc:kap:expeco:v:18:y:2015:i:3:p:356-365
    DOI: 10.1007/s10683-014-9407-y
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    References listed on IDEAS

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    2. William T. Harbaugh & Kate Krause & Timothy R. Berry, 2001. "GARP for Kids: On the Development of Rational Choice Behavior," American Economic Review, American Economic Association, vol. 91(5), pages 1539-1545, December.
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    6. Sippel, Reinhard, 1997. "An Experiment on the Pure Theory of Consumer's Behaviour," Economic Journal, Royal Economic Society, vol. 107(444), pages 1431-1444, September.
    7. Samiran Banerjee & James Murphy, 2009. "A simplified test for preference rationality of two-commodity choice," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 252-252, June.
    8. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
    9. Samiran Banerjee & James Murphy, 2011. "Do rational demand functions differ from irrational ones? Evidence from an induced budget experiment," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3863-3882.
    10. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
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    Cited by:

    1. Mir Adnan Mahmood & John Rehbeck, 2022. "Correcting for Random Budgets in Revealed Preference Experiments," Games, MDPI, vol. 13(2), pages 1-14, April.
    2. Federico Echenique, 2021. "On the meaning of the Critical Cost Efficiency Index," Papers 2109.06354, arXiv.org, revised Apr 2022.
    3. Roy Allen & John Rehbeck, 2021. "Measuring rationality: percentages vs expenditures," Theory and Decision, Springer, vol. 91(2), pages 265-277, September.

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    More about this item

    Keywords

    Afriat; Critical cost efficiency index; Rationality; Revealed preference; D01; D03; D11; D12;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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