IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v43y2011i26p3863-3882.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036841003724486
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/00036841003724486?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-598, October.
    2. Cameron, A Colin & Trivedi, Pravin K, 1986. "Econometric Models Based on Count Data: Comparisons and Applications of Some Estimators and Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(1), pages 29-53, January.
    3. Raymond Fisman & Shachar Kariv & Daniel Markovits, 2007. "Individual Preferences for Giving," American Economic Review, American Economic Association, vol. 97(5), pages 1858-1876, December.
    4. John Hey & Jinkwon Lee, 2005. "Do subjects remember the past?," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 9-18.
    5. Matzkin, Rosa L. & Richter, Marcel K., 1991. "Testing strictly concave rationality," Journal of Economic Theory, Elsevier, vol. 53(2), pages 287-303, April.
    6. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty," Economics Working Papers 0076, Institute for Advanced Study, School of Social Science.
    7. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 73-106.
    8. Hugh Rose, 1958. "Consistency of Preference: The Two-Commodity Case," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 124-125.
    9. Varian, H.R., 1991. "Goodness of Fit for Revealed Preference Tests," Papers 13, Michigan - Center for Research on Economic & Social Theory.
    10. Samiran Banerjee & James Murphy, 2009. "A simplified test for preference rationality of two-commodity choice," Experimental Economics, Springer;Economic Science Association, vol. 12(2), pages 252-252, June.
    11. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
    12. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(3), pages 419-425.
    13. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    14. Glenn W. Harrison & Ronald M. Harstad & E. Elisabet Rutstr–m, 2004. "Experimental Methods and Elicitation of Values," Experimental Economics, Springer;Economic Science Association, vol. 7(2), pages 123-140, June.
    15. John D. Hey & Chris Orme, 2018. "Investigating Generalizations Of Expected Utility Theory Using Experimental Data," World Scientific Book Chapters, in: Experiments in Economics Decision Making and Markets, chapter 3, pages 63-98, World Scientific Publishing Co. Pte. Ltd..
    16. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    17. Sippel, Reinhard, 1997. "An Experiment on the Pure Theory of Consumer's Behaviour," Economic Journal, Royal Economic Society, vol. 107(444), pages 1431-1444, September.
    18. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. van Bruggen, Paul & Heufer, Jan, 2017. "Afriat in the lab," Journal of Economic Theory, Elsevier, vol. 169(C), pages 546-550.
    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. 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.
    4. Heufer, Jan, 2014. "Nonparametric comparative revealed risk aversion," Journal of Economic Theory, Elsevier, vol. 153(C), pages 569-616.
    5. Matej Opatrny, 2018. "Extent of Irrationality of the Consumer: Combining the Critical Cost Eciency and Houtman Maks Indices," Working Papers IES 2018/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2018.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Heufer, Jan, 2014. "Nonparametric comparative revealed risk aversion," Journal of Economic Theory, Elsevier, vol. 153(C), pages 569-616.
    2. Pawe{l} Dziewulski & Joshua Lanier & John K. -H. Quah, 2024. "Revealed preference and revealed preference cycles: a survey," Papers 2405.08459, arXiv.org.
    3. Jim Engle-Warnick & Natalia Mishagina, 2014. "Insensitivity to Prices in a Dictator Game," CIRANO Working Papers 2014s-19, CIRANO.
    4. 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.
    5. 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.
    6. Jan Heufer, 2014. "A geometric approach to revealed preference via Hamiltonian cycles," Theory and Decision, Springer, vol. 76(3), pages 329-341, March.
    7. Pawel Dziewulski, 2018. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency," Economics Series Working Papers 848, University of Oxford, Department of Economics.
    8. van Bruggen, Paul & Heufer, Jan, 2017. "Afriat in the lab," Journal of Economic Theory, Elsevier, vol. 169(C), pages 546-550.
    9. Matej Opatrny, 2018. "Extent of Irrationality of the Consumer: Combining the Critical Cost Eciency and Houtman Maks Indices," Working Papers IES 2018/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2018.
    10. Brocas, Isabelle & Carrillo, Juan D. & Combs, T. Dalton & Kodaverdian, Niree, 2019. "Consistency in simple vs. complex choices by younger and older adults," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 580-601.
    11. Dziewulski, Paweł, 2020. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency index," Journal of Economic Theory, Elsevier, vol. 188(C).
    12. Marcos Demetry & Per Hjertstrand & Matthew Polisson, 2022. "Testing axioms of revealed preference in Stata," Stata Journal, StataCorp LP, vol. 22(2), pages 319-343, June.
    13. Laurens Cherchye & Thomas Demuynck & Bram De Rock & Joshua Lanier, 2020. "Are Consumers Rational ?Shifting the Burden of Proof," Working Papers ECARES 2020-19, ULB -- Universite Libre de Bruxelles.
    14. Pawel Dziewulski, 2021. "A comprehensive revealed preference approach to approximate utility maximisation," Working Paper Series 0621, Department of Economics, University of Sussex Business School.
    15. Uttara Balakrishnan & Johannes Haushofer & Pamela Jakiela, 2020. "How soon is now? Evidence of present bias from convex time budget experiments," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 294-321, June.
    16. Fisman, Raymond & Jakiela, Pamela & Kariv, Shachar, 2017. "Distributional preferences and political behavior," Journal of Public Economics, Elsevier, vol. 155(C), pages 1-10.
    17. Im, Changkuk & Rehbeck, John, 2022. "Non-rationalizable individuals and stochastic rationalizability," Economics Letters, Elsevier, vol. 219(C).
    18. Carrillo, Juan & Brocas, Isabelle & Combs, T. Dalton, 2015. "Consistency in Simple vs. Complex Choices over the Life Cycle," CEPR Discussion Papers 10457, C.E.P.R. Discussion Papers.
    19. Yoram Halevy & Dotan Persitz & Lanny Zrill, 2018. "Parametric Recoverability of Preferences," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1558-1593.
    20. Castillo, Marco E. & Cross, Philip J. & Freer, Mikhail, 2019. "Nonparametric utility theory in strategic settings: Revealing preferences and beliefs from proposal–response games," Games and Economic Behavior, Elsevier, vol. 115(C), pages 60-82.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:43:y:2011:i:26:p:3863-3882. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.