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Is Utility Transferable? A Revealed Preference Analysis

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  • Cherchye, L.J.H.
  • Demuynck, T.
  • Rock, B. de

    (Tilburg University, Center for Economic Research)

Abstract

We provide a revealed preference analysis of the transferable utility hypothesis, which is widely used in economic models. First, we establish revealed preference conditions that must be satisfied for observed group behavior to be consistent with Pareto efficiency under transferable utility. Next, we show that these conditions are easily testable by means of integer programming methods. The tests are entirely nonparametric, which makes them robust with respect to specification errors. Finally, we demonstrate the practical usefulness of our conditions by means of an application to Spanish consumption data. To the best of our knowledge, this is the first empirical test of the transferable utility hypothesis.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-018.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011018

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Web page: http://center.uvt.nl

Related research

Keywords: transferable utility hypothesis; generalized quasi-linearity; nonparamet- ric tests; revealed preferences;

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References

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  1. Laurens Cherchye & Ian Crawford & Bram De Rock & Frederic Vermeulen, 2012. "Aggregation without the aggravation? Nonparametric analysis of the representative consumer," CeMMAP working papers CWP03/12, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Cherchye, L.J.H. & Rock, B. de & Vermeulen, F.M.P., 2011. "The revealed preference approach to collective consumption behavior: Testing and sharing rule recovery," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3857700, Tilburg University.
  3. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
  4. 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.
  5. Bergstrom, Theodore C & Cornes, Richard C, 1983. "Independence of Allocative Efficiency from Distribution in the Theory of Public Goods," Econometrica, Econometric Society, vol. 51(6), pages 1753-65, November.
  6. Bergstrom, Theodore C, 1989. "A Fresh Look at the Rotten Kid Theorem--and Other Household Mysteries," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1138-59, October.
  7. Varian, Hal R., 1988. "Revealed preference with a subset of goods," Journal of Economic Theory, Elsevier, vol. 46(1), pages 179-185, October.
  8. Donald Brown & Caterina Calsamiglia, 2007. "The Nonparametric Approach to Applied Welfare Analysis," Economic Theory, Springer, vol. 31(1), pages 183-188, April.
  9. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  10. Bergstrom, Theodore C. & Varian, Hal R., 1985. "When do market games have transferable utility?," Journal of Economic Theory, Elsevier, vol. 35(2), pages 222-233, August.
  11. Cherchye, L.J.H. & Demuynck, T. & Rock, B. de, 2011. "Is Utility Transferable? A Revealed Preference Analysis," Discussion Paper 2011-018, Tilburg University, Center for Economic Research.
  12. Diewert, W E, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 419-25, July.
  13. Chiappori, Pierre-Andre, 2010. "Testable implications of transferable utility," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1302-1317, May.
  14. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  15. Bergstrom, Theodore C. & Cornes, Richard C., 1981. "Gorman and Musgrave are dual : An Antipodean theorem on public goods," Economics Letters, Elsevier, vol. 7(4), pages 371-378.
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Cited by:
  1. Cherchye, L.J.H. & Demuynck, T. & Rock, B. de, 2011. "Is Utility Transferable? A Revealed Preference Analysis," Discussion Paper 2011-018, Tilburg University, Center for Economic Research.
  2. Laurens CHERCHYE & Thomas DEMUYNCK & Bram DE ROCK & Frederic VERMEULEN, 2014. "Household consumption when the marriage is stable," Center for Economic Studies - Discussion papers ces14.08, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.

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