The World According to GARP* : Non-parametric Tests of Demand Theory and Rational Behavior
AbstractThe purpose of this paper is twofold. We first point out that violation of rationality axioms (SARP, GARP, WARP) do not necessarily lead to a non-rational behavior. Second, our tests of axioms SARP, GARP and WARP over a Polish panel data (1987-90) show that over the 3630 households only 240 violate the three axioms. However these 240 violations are not caused by the non-respect of demand theory axioms but by the changing of preferences over the period. A logistic regression confirms the robustness of the test since the more the real expenditure increases in absolute value, the more the probability of violating the axioms increases (the respect of the axioms by the 3390 households is not due to an increase of the real expenditure). Moreover, changing in the composition of the family structure increases the probability of being inconsistent. It seems therefore that the 240 apparent violations are due to the appearance of new constraints, which increase the shadow prices of the goods. In order to explain these 240 households' preference changes, we build an econometric model of prices including an observed monetary component and an unobserved non-monetary component expressing the constraints faced by the agent. The estimation of this econometric model shows that the agents who apparently violate the axioms have these complete price changes superior to those of the agents who respect the axioms. Thus the agents who apparently violate the axioms faced during the period a change of their non-monetary resources and the appearance of new constraints.
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Date of creation: 01 Apr 2008
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Rationality; GARP; Non-parametric tests; Shadow prices.;
Other versions of this item:
- Marc-Arthur Diaye & François Gardes & Christophe Starzec, 2001. "The World According to GARP : Non-parametric Tests of Demand Theory and Rational Behavior," Working Papers 2001-27, Centre de Recherche en Economie et Statistique.
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- Bergtold, Jason S. & Akobundu, Eberechukwu & Peterson, Everett B., 2004.
"The FAST Method: Estimating Unconditional Demand Elasticities for Processed Foods in the Presence of Fixed Effects,"
Journal of Agricultural and Resource Economics,
Western Agricultural Economics Association, vol. 29(02), August.
- Bergtold, Jason S. & Akobundu, Eberechukwu & Peterson, Everett B., 2003. "The Fast Method: Estimating Unconditional Demand Elasticities For Processed Food In The Presence Of Fixed Effects," 2003 Annual meeting, July 27-30, Montreal, Canada 21893, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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