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Slutsky matrix norms: The size, classification, and comparative statics of bounded rationality

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  • Aguiar, Victor H.
  • Serrano, Roberto

Abstract

Given any observed demand behavior —by means of a demand function—, we quantify by how much it departs from rationality. The measure of the gap is the smallest Frobenius norm of the correcting matrix function that would yield a Slutsky matrix with its standard rationality properties (symmetry, singularity, and negative semidefiniteness). As a result, we are able to suggest a useful classification of departures from rationality, corresponding to three anomalies: inattentiveness to changes in purchasing power, money illusion, and violations of the compensated law of demand. Errors in comparative-statics predictions from assuming rationality are decomposed as the sum of a behavioral error (due to the agent) and a specification error (due to the modeller). Illustrations are provided using several bounded rationality models.

Suggested Citation

  • Aguiar, Victor H. & Serrano, Roberto, 2017. "Slutsky matrix norms: The size, classification, and comparative statics of bounded rationality," Journal of Economic Theory, Elsevier, vol. 172(C), pages 163-201.
  • Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:163-201
    DOI: 10.1016/j.jet.2017.08.007
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    Citations

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    Cited by:

    1. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    2. Victor H. Aguiar & Roberto Serrano, 2018. "Cardinal Revealed Preference, Price-Dependent Utility, and Consistent Binary Choice," Working Papers 2018-3, Brown University, Department of Economics.
    3. Victor H. Aguiar & Roland Pongou & Roberto Serrano & Jean-Baptiste Tondji, 2018. "An Index of Unfairness," Working Papers 2018-9, Brown University, Department of Economics.
    4. repec:eee:gamebe:v:111:y:2018:i:c:p:41-63 is not listed on IDEAS
    5. Geoffroy de Clippel & Kareen Rozen, 2018. "Consumer Theory with Misperceived Tastes," Working Papers 2018-10, Brown University, Department of Economics.
    6. repec:spr:series:v:9:y:2018:i:4:d:10.1007_s13209-018-0178-0 is not listed on IDEAS

    More about this item

    Keywords

    Consumer theory; Slutsky matrix function; Bounded rationality; Comparative statics; Sparse-max consumer; Collective model;

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D10 - Microeconomics - - Household Behavior - - - General

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