IDEAS home Printed from https://ideas.repec.org/p/eca/wpaper/2013-307516.html
   My bibliography  Save this paper

Are Consumers Rational ?Shifting the Burden of Proof

Author

Listed:
  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock
  • Joshua Lanier

Abstract

We present a statistical test for the hypothesis of rational utility maximization on the basis of nonparametric revealed preference conditions. Our test is conservative for the utility maximization hypothesis. We take as null hypothesis that the consumer behaves randomly, and as alternative hypothesis that she is approximately utility maximizing. Our statistical test uses a permutation method to operationalize the principle of random consumer behavior. We show that the test has an asymptotic power of one against the alternative hypothesis of approximately utility maximizing behavior. We also provide simulated power results and two empirical applications (to experimental and observational data, respectively).

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Joshua Lanier, 2020. "Are Consumers Rational ?Shifting the Burden of Proof," Working Papers ECARES 2020-19, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/307516
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/307516/3/2020-19-CHERCHYE_DEMUYNCK_DEROCK_LANIER-areconsummers.pdf
    File Function: Full text for the whole work, or for a work part
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Syngjoo Choi & Shachar Kariv & Wieland M?ller & Dan Silverman, 2014. "Who Is (More) Rational?," American Economic Review, American Economic Association, vol. 104(6), pages 1518-1550, June.
    2. A. Fostel & H. Scarf & M. Todd, 2004. "Two new proofs of Afriat’s theorem," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(1), pages 211-219, July.
    3. Yuichi Kitamura & Jörg Stoye, 2018. "Nonparametric Analysis of Random Utility Models," Econometrica, Econometric Society, vol. 86(6), pages 1883-1909, November.
    4. Federico Echenique & Sangmok Lee & Matthew Shum, 2011. "The Money Pump as a Measure of Revealed Preference Violations," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1201-1223.
    5. Dziewulski, Paweł, 2020. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency index," Journal of Economic Theory, Elsevier, vol. 188(C).
    6. Matthew Polisson & John K.-H. Quah & Ludovic Renou, 2020. "Revealed Preferences over Risk and Uncertainty," American Economic Review, American Economic Association, vol. 110(6), pages 1782-1820, June.
    7. Jose Apesteguia & Miguel A. Ballester, 2015. "A Measure of Rationality and Welfare," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1278-1310.
    8. Raymond Fisman & Shachar Kariv & Daniel Markovits, 2007. "Individual Preferences for Giving," American Economic Review, American Economic Association, vol. 97(5), pages 1858-1876, December.
    9. Mark Dean & Daniel Martin, 2016. "Measuring Rationality with the Minimum Cost of Revealed Preference Violations," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 524-534, July.
    10. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty," Economics Working Papers 0076, Institute for Advanced Study, School of Social Science.
    11. Selten, Reinhard, 1991. "Properties of a measure of predictive success," Mathematical Social Sciences, Elsevier, vol. 21(2), pages 153-167, April.
    12. Timothy K. M. Beatty & Ian A. Crawford, 2011. "How Demanding Is the Revealed Preference Approach to Demand?," American Economic Review, American Economic Association, vol. 101(6), pages 2782-2795, October.
    13. Varian, H.R., 1991. "Goodness of Fit for Revealed Preference Tests," Papers 13, Michigan - Center for Research on Economic & Social Theory.
    14. 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.
    15. Donald Brown & Caterina Calsamiglia, 2007. "The Nonparametric Approach to Applied Welfare Analysis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(1), pages 183-188, April.
    16. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(3), pages 419-425.
    17. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    18. Fortunato Pesarin & Luigi Salmaso, 2010. "The permutation testing approach: a review," Statistica, Department of Statistics, University of Bologna, vol. 70(4), pages 481-509.
    19. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    20. Chambers,Christopher P. & Echenique,Federico, 2016. "Revealed Preference Theory," Cambridge Books, Cambridge University Press, number 9781107087804.
    21. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Demuynck, Thomas & Salman, Umutcan, 2022. "On the revealed preference analysis of stable aggregate matchings," Theoretical Economics, Econometric Society, vol. 17(4), November.
    2. Marco Castillo & Mikhail Freer, 2023. "A general revealed preference test for quasilinear preferences: theory and experiments," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 673-696, July.
    3. Federico Echenique, 2021. "On the meaning of the Critical Cost Efficiency Index," Papers 2109.06354, arXiv.org, revised Apr 2022.
    4. Mikhail Freer & Marco Castillo, 2021. "A General Revealed Preference Test for Quasilinear Preferences: Theory and Experiments," Papers 2111.01248, arXiv.org, revised Dec 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thomas Demuynck & John Rehbeck, 2023. "Computing revealed preference goodness-of-fit measures with integer programming," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(4), pages 1175-1195, November.
    2. Dziewulski, Paweł, 2020. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency index," Journal of Economic Theory, Elsevier, vol. 188(C).
    3. Pawel Dziewulski, 2021. "A comprehensive revealed preference approach to approximate utility maximisation," Working Paper Series 0621, Department of Economics, University of Sussex Business School.
    4. Pawel Dziewulski, 2018. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency," Economics Series Working Papers 848, University of Oxford, Department of Economics.
    5. Smeulders, Bart & Crama, Yves & Spieksma, Frits C.R., 2019. "Revealed preference theory: An algorithmic outlook," European Journal of Operational Research, Elsevier, vol. 272(3), pages 803-815.
    6. Yoram Halevy & Dotan Persitz & Lanny Zrill, 2018. "Parametric Recoverability of Preferences," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1558-1593.
    7. Demuynck, Thomas & Hjertstrand, Per, 2019. "Samuelson's Approach to Revealed Preference Theory: Some Recent Advances," Working Paper Series 1274, Research Institute of Industrial Economics.
    8. Brocas, Isabelle & Carrillo, Juan D. & Combs, T. Dalton & Kodaverdian, Niree, 2019. "Consistency in simple vs. complex choices by younger and older adults," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 580-601.
    9. Eileen Tipoe & Abi Adams & Ian Crawford, 2022. "Revealed preference analysis and bounded rationality [Consume now or later? Time inconsistency, collective choice and revealed preference]," Oxford Economic Papers, Oxford University Press, vol. 74(2), pages 313-332.
    10. Aluma Dembo & Shachar Kariv & Matthew Polisson & John Quah, 2021. "Ever since Allais," IFS Working Papers W21/15, Institute for Fiscal Studies.
    11. Jim Engle-Warnick & Natalia Mishagina, 2014. "Insensitivity to Prices in a Dictator Game," CIRANO Working Papers 2014s-19, CIRANO.
    12. Tipoe, Eileen, 2021. "Price inattention: A revealed preference characterisation," European Economic Review, Elsevier, vol. 134(C).
    13. Changkuk Im & John Rehbeck, 2021. "Non-rationalizable Individuals, Stochastic Rationalizability, and Sampling," Papers 2102.03436, arXiv.org, revised Oct 2021.
    14. Sam Cosaert & Thomas Demuynck, 2015. "Revealed preference theory for finite choice sets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(1), pages 169-200, May.
    15. Mir Adnan Mahmood & John Rehbeck, 2022. "Correcting for Random Budgets in Revealed Preference Experiments," Games, MDPI, vol. 13(2), pages 1-14, April.
    16. Heufer, Jan, 2014. "Nonparametric comparative revealed risk aversion," Journal of Economic Theory, Elsevier, vol. 153(C), pages 569-616.
    17. Geoffroy de Clippel & Kareen Rozen, 2020. "Relaxed Optimization: e-Rationalizability and the FOC-Departure Index in Consumer Theory," Working Papers 2020-07, Brown University, Department of Economics.
    18. Roy Allen & John Rehbeck, 2021. "Measuring rationality: percentages vs expenditures," Theory and Decision, Springer, vol. 91(2), pages 265-277, September.
    19. Im, Changkuk & Rehbeck, John, 2022. "Non-rationalizable individuals and stochastic rationalizability," Economics Letters, Elsevier, vol. 219(C).
    20. Marcos Demetry & Per Hjertstrand & Matthew Polisson, 2022. "Testing axioms of revealed preference in Stata," Stata Journal, StataCorp LP, vol. 22(2), pages 319-343, June.

    More about this item

    Keywords

    utility maximization; revealed preferences; random behavior; permutation test;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eca:wpaper:2013/307516. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Benoit Pauwels (email available below). General contact details of provider: https://edirc.repec.org/data/arulbbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.