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The Money Pump as a Measure of Revealed Preference Violations

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Author Info

  • Federico Echenique
  • Sangmok Lee
  • Matthew Shum

Abstract

We introduce a measure of the severity of violations of the revealed preference axioms, the money pump index (MPI). The MPI is the amount of money one can extract from a consumer who violates the axioms. It is also a statistical test for the hypothesis that a consumer is rational when behavior is observed with error. We present an application using a panel data set of food expenditures. The data exhibit many violations of the axioms. Mostly, the MPI for these violations is small. The MPI indicates that the hypothesis of consumer rationality cannot be rejected.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/665011
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File URL: http://www.jstor.org/stable/full/10.1086/665011
Download Restriction: Access to the online full text or PDF requires a subscription.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 119 (2011)
Issue (Month): 6 ()
Pages: 1201 - 1223

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Handle: RePEc:ucp:jpolec:doi:10.1086/665011

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Halevy, Yoram, 2012. "Parametric Recoverability of Preferences," Microeconomics.ca working papers yoram_halevy-2012-20, Vancouver School of Economics, revised 07 Apr 2014.
  2. Victor H. Aguiar & Roberto Serrano, 2013. "Slutsky Matrix Norms and the Size of Bounded Rationality," Working Papers 2013-16, Brown University, Department of Economics.
  3. Francoise Forges & Vincent Iehlé, 2013. "Afriat's Theorem for Indivisible Goods," CESifo Working Paper Series 4498, CESifo Group Munich.
  4. Ekeland, Ivar & Galichon, Alfred, 2012. "The housing problem and revealed preference theory: duality and an application," Economics Papers from University Paris Dauphine 123456789/10574, Paris Dauphine University.
  5. Yuichi Kitamura & Jörg Stoye, 2013. "Nonparametric analysis of random utility models: testing," CeMMAP working papers CWP36/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Ivar Ekeland & Alfred Galichon, 2013. "The Housing Problem and Revealed Preference Theory: Duality and an application," Sciences Po publications info:hdl:2441/5rkqqmvrn4t, Sciences Po.
  7. Jose Apesteguia & Miguel A. Ballester, 2011. "A Measure of Rationality and Welfare," Working Papers 573, Barcelona Graduate School of Economics.
  8. Jose Apesteguia & Miguel Ballester, 2009. "Choice by Sequential Procedures," NajEcon Working Paper Reviews 814577000000000404, www.najecon.org.

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