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Choice, Rationality and Welfare Measurement

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  • Green, Jerry

    (Harvard U)

  • Hojman, Daniel

Abstract

We present a method for evaluating the welfare of a decision maker, based on observed choice data. Unlike the standard economic theory of revealed preference, our method can be used whether or not the observed choices are rational. Paralleling the standard theory we present a model for choice such that the observations arise "as if" they were the result of a specific decision making process. However, in place of the usual preference relation whose maximization induces the observations, we explain choice as arising from a compromise among a set of simultaneously held, conflicting preference relations. As in revealed preference theory, these simultaneously held preferences are inferred from the choice data and we use them as the basis to discuss the decision maker’s welfare. In general our method does not yield a unique set of explanatory preferences and therefore we characterize all the explanatory sets of preferences. We use this set to compute bounds on welfare changes. We show that some standard results of rational choice theory can be extended to irrational decision makers. The theory can be used to explore a number of context-dependent choice patterns found in psychological experiments.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-054.

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Date of creation: Nov 2007
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Handle: RePEc:ecl:harjfk:rwp07-054

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References

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  1. Forges, Françoise & Minelli, Enrico, 2009. "Afriat's theorem for general budget sets," Journal of Economic Theory, Elsevier, vol. 144(1), pages 135-145, January.
  2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
  3. Anna Fostel & Herbert E. Scarf & Michael J. Todd, 2003. "Two New Proofs of Afriat's Theorem," Cowles Foundation Discussion Papers 1415, Cowles Foundation for Research in Economics, Yale University.
  4. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  5. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
  6. Saari, Donald G., 1989. "A dictionary for voting paradoxes," Journal of Economic Theory, Elsevier, vol. 48(2), pages 443-475, August.
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Citations

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Cited by:
  1. Geoffroy de Clippel & Kfir Eliaz, 2009. "Reason-Based Choice: A Bargaining Rationale for the Attraction and Compromise Effects," Working Papers 2009-4, Brown University, Department of Economics.
  2. Sandroni, Alvaro & Cherepavov, Vadim & Feddersen, Timothy, 2013. "Rationalization," Theoretical Economics, Econometric Society, vol. 8(3), September.
  3. repec:hal:cesptp:halshs-00788647 is not listed on IDEAS
  4. Dalton, P.S. & Ghosal, S., 2010. "Behavioral Decisions and Welfare (Replaces CentER DP 2010-22)," Discussion Paper 2010-143, Tilburg University, Center for Economic Research.
  5. Yusufcan Masatlioglu & Daisuke Nakajima & Erkut Ozbay, 2009. "Revealed Attention," NajEcon Working Paper Reviews 814577000000000409, www.najecon.org.
  6. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
  7. Nakajima, Daisuke & Masatlioglu, Yusufcan, 2013. "Choice by iterative search," Theoretical Economics, Econometric Society, vol. 8(3), September.
  8. Noor, Jawwad, 2013. "Removed preferences," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1463-1486.
  9. Attila Ambrus & Kareen Rozen, 2012. "Rationalizing Choice with Multi-Self Models," Levine's Working Paper Archive 786969000000000512, David K. Levine.
  10. Jose Apesteguia & Miguel A. Ballester, 2011. "A Measure of Rationality and Welfare," Working Papers 573, Barcelona Graduate School of Economics.
  11. Ivan Soraperra, 2009. "Revealed Preferences, Choices, and Psychological Indexes," Working Papers 643, Queen Mary, University of London, School of Economics and Finance.
  12. Vadim Cherepanov & Tim Feddersen & Alvaro Sandroni, 2013. "Revealed preferences and aspirations in warm glow theory," Economic Theory, Springer, vol. 54(3), pages 501-535, November.
  13. B. Douglas Bernheim & Antonio Rangel, 2008. "Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics," NBER Working Papers 13737, National Bureau of Economic Research, Inc.
  14. Attila Ambrus & Kareen Rozen, 2008. "Revealed Conflicting Preferences," Levine's Working Paper Archive 122247000000002161, David K. Levine.

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