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Measuring Rationality with the Minimum Cost of Revealed Preference Violations

Author

Listed:
  • Mark Dean

    (Brown University)

  • Daniel Martin

    (Paris School of Economics)

Abstract

We introduce a new measure of how close a set of choices is to satisfying the observable implications of rationality and apply it to a large, balanced panel of household level consumption data. This new measure, the minimum cost index, is the minimum cost of breaking all revealed preference cycles found in choices from budget sets. Unlike existing measures of rationality, it responds to both the number and severity of revealed preference violations.

Suggested Citation

  • Mark Dean & Daniel Martin, 2016. "Measuring Rationality with the Minimum Cost of Revealed Preference Violations," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 524-534, July.
    • Handle: RePEc:tpr:restat:v:98:y:2016:i:3:p:524-534
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00542
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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