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

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  • Samiran Banerjee
  • James Murphy

Abstract

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.

Suggested Citation

  • Samiran Banerjee & James Murphy, 2011. "Do rational demand functions differ from irrational ones? Evidence from an induced budget experiment," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3863-3882.
  • Handle: RePEc:taf:applec:v:43:y:2011:i:26:p:3863-3882
    DOI: 10.1080/00036841003724486
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    Cited by:

    1. repec:eee:jetheo:v:169:y:2017:i:c:p:546-550 is not listed on IDEAS
    2. Jan Heufer, 2013. "Testing revealed preferences for homotheticity with two-good experiments," Experimental Economics, Springer;Economic Science Association, vol. 16(1), pages 114-124, March.
    3. Heufer, Jan, 2014. "Nonparametric comparative revealed risk aversion," Journal of Economic Theory, Elsevier, vol. 153(C), pages 569-616.
    4. Jan Heufer & Paul van Bruggen, 2016. "Afriat in the Lab," Tinbergen Institute Discussion Papers 16-095/I, Tinbergen Institute.
    5. James Murphy & Samiran Banerjee, 2015. "A caveat for the application of the critical cost efficiency index in induced budget experiments," Experimental Economics, Springer;Economic Science Association, vol. 18(3), pages 356-365, September.

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