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The Money Pump as a Measure of Revealed Preference Violations

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  • Federico Echenique
  • Sangmok Lee
  • Matthew Shum

Abstract

We introduce a measure of the severity of violations of the revealed preference axioms, the money pump index (MPI). The MPI is the amount of money one can extract from a consumer who violates the axioms. It is also a statistical test for the hypothesis that a consumer is rational when behavior is observed with error. We present an application using a panel data set of food expenditures. The data exhibit many violations of the axioms. Mostly, the MPI for these violations is small. The MPI indicates that the hypothesis of consumer rationality cannot be rejected.

Suggested Citation

  • Federico Echenique & Sangmok Lee & Matthew Shum, 2011. "The Money Pump as a Measure of Revealed Preference Violations," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1201-1223.
  • Handle: RePEc:ucp:jpolec:doi:10.1086/665011
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    References listed on IDEAS

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    1. Timothy Berry & William Harbaugh & Kate Krause, 2001. "Garp for kids: On the development of rational choice behavior," Artefactual Field Experiments 00056, The Field Experiments Website.
    2. David R. Bell & James M. Lattin, 1998. "Shopping Behavior and Consumer Preference for Store Price Format: Why “Large Basket” Shoppers Prefer EDLP," Marketing Science, INFORMS, pages 66-88.
    3. William T. Harbaugh & Kate Krause & Timothy R. Berry, 2001. "GARP for Kids: On the Development of Rational Choice Behavior," American Economic Review, American Economic Association, vol. 91(5), pages 1539-1545, December.
    4. Matthew Shum, 2004. "Does Advertising Overcome Brand Loyalty? Evidence from the Breakfast-Cereals Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 241-272, June.
    5. Jerison, David & Jerison, Michael, 2001. "Real income growth and revealed preference inconsistency," UC3M Working papers. Economics we012902, Universidad Carlos III de Madrid. Departamento de Economía.
    6. repec:zbw:rwirep:0069 is not listed on IDEAS
    7. 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.
    8. Chalfant, James A & Alston, Julian M, 1988. "Accounting for Changes in Tastes," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 391-410, April.
    9. Hyun J. Jin & Won W. Koo, 2003. "The effect of the BSE outbreak in Japan on consumers' preferences," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 30(2), pages 173-192, June.
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