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How many consumers are rational?

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  • Stefan Hoderlein

    ()
    (Institute for Fiscal Studies and Brown)

Abstract

Rationality places strong restrictions on individual consumer behavior. This paper is concerned with assessing the validity of the integrability constraints imposed by standard utility maximization, arising in classical consumer demand analysis. More specifically, we characterize the testable implications of negative semidefiniteness and symmetry of the Slutsky matrix across a heterogeneous population without assuming anything on the functional form of individual preferences. In the same spirit, homogeneity of degree zero is being considered. Our approach employs nonseparable models and is centered around a conditional independence assumption, which is sufficiently general to allow for endogenous regressors. It is the only substantial assumption a researcher has to specify in this model, and has to be evaluated with particular care. Finally, we apply all concepts to British household data: We show that rationality is an acceptable description for large parts of the population, regardless of whether we test on single or composite households.

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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP32/09.

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Date of creation: Nov 2009
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Handle: RePEc:ifs:cemmap:32/09

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  1. Haerdle,W. Hildenbrand,W. Jerison,M., 1988. "Empirical evidence on the law of demand," Discussion Paper Serie A 193, University of Bonn, Germany.
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  3. Haag, Berthold R. & Hoderlein, Stefan & Pendakur, Krishna, 2009. "Testing and imposing Slutsky symmetry in nonparametric demand systems," Journal of Econometrics, Elsevier, vol. 153(1), pages 33-50, November.
  4. Hoderlein, Stefan & Mihaleva, Sonya, 2008. "Increasing the price variation in a repeated cross section," Journal of Econometrics, Elsevier, vol. 147(2), pages 316-325, December.
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  17. Richard Blundell & Xiaohong Chen & Dennis Kristensen, 2007. "Semi-Nonparametric IV Estimation of Shape-Invariant Engel Curves," Econometrica, Econometric Society, vol. 75(6), pages 1613-1669, November.
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  19. Hoderlein, Stefan & Klemelä, Jussi & Mammen, Enno, 2010. "Analyzing The Random Coefficient Model Nonparametrically," Econometric Theory, Cambridge University Press, vol. 26(03), pages 804-837, June.
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