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Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics

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  • B. Douglas Bernheim
  • Antonio Rangel

Abstract

We propose a broad generalization of standard choice-theoretic welfare economics that encompasses a wide variety of non-standard behavioral models. Our approach exploits the coherent aspects of choice which those positive models typically attempt to capture. It replaces the standard revealed preference relation with an unambiguous choice relation: roughly, x is (strictly) unambiguously chosen over y (written xP*y) if y is never chosen when x is available. Under weak assumptions, P* is acyclic and therefore suitable for welfare analysis; it is also the most discerning welfare criterion that never overrules choice. The resulting framework generates natural counterparts for the standard tools of applied welfare economics, and is easily applied in the context of specific behavioral theories, with novel implications. Though not universally discerning, it lends itself to principled refinements.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13737.

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Date of creation: Jan 2008
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Handle: RePEc:nbr:nberwo:13737

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