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Do Rational Demand Estimates Differ from Irrational Ones? Evidence from an Induced Budget Experiment

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  • Shomu Banerjee
  • James H. Murphy
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    Abstract

    Both early and recent work have highlighted certain similarities between rational and irrational demand. We re-examine these findings using experimental choice data. After separating our subjects' choices into rational and irrational subsets based on consistency with the axioms of revealed preference, we estimate and compare demand coefficients from the resulting subsamples, finding significant differences between the two. We also predict consistency based on sociodemographics and cognitive ability, then split the sample using predicted consistency and again estimate and compare the resulting subsamples' demand coefficients. These comparisons indicate differences between rational and irrational demand and are largely consistent with successful prediction.

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    Bibliographic Info

    Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0714.

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    Date of creation: Sep 2007
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    Handle: RePEc:emo:wp2003:0714

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    1. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 73-105, February.
    2. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
    3. Matzkin, Rosa L. & Richter, Marcel K., 1991. "Testing strictly concave rationality," Journal of Economic Theory, Elsevier, vol. 53(2), pages 287-303, April.
    4. 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.
    5. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
    6. Kim, Taesung & Richter, Marcel K., 1986. "Nontransitive-nontotal consumer theory," Journal of Economic Theory, Elsevier, vol. 38(2), pages 324-363, April.
    7. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
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