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Do rational demand functions differ from irrational ones? Evidence from an induced budget experiment

  • Samiran Banerjee
  • James Murphy
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    Various studies (e.g. Becker, 1962; Ariely et�al., 2003) have noted anomalies concerning the relationship between observed demand and the preferences presumed to motivate it. We re-examine these findings using experimental choice data. After separating our subjects' choices into rational and irrational subsets based on consistency with the axioms of revealed preference, we estimate and compare demand coefficients. Mirroring Ariely et�al.'s 'coherently arbitrary' choice, both rational and irrational demand estimates exhibit negative price and positive endowment coefficients. However, a comparison of the full set of demand coefficients indicates significant differences between the two, yielding an observable artefact of the preference hypothesis. Relaxing the goodness-of-fit of the revealed preference test (Afriat, 1987; Varian, 1994) does not alter our findings.

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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 43 (2011)
    Issue (Month): 26 ()
    Pages: 3863-3882

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    Handle: RePEc:taf:applec:v:43:y:2011:i:26:p:3863-3882
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