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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 nonstandard behavioral models. Our approach exploits the coherent aspects of choice that 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) iff 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.

Suggested Citation

  • B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 51-104.
  • Handle: RePEc:oup:qjecon:v:124:y:2009:i:1:p:51-104.
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    File URL: http://hdl.handle.net/10.1162/qjec.2009.124.1.51
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