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Testing for Rationality with Consumption Data: Demographics and Heterogeneity

In this paper, we introduce a new measure of how close a set of choices are to satisfying the observable implications of rational choice, and apply it to a large balanced panel of household level consumption data. We use this method to answer three related questions: (i) "How close are individual consumption choices to satisfying the model of utility maximization?" (ii) "Are there di¤erences in rationality between di¤erent demographic groups?" (iii) "Can choices be aggregated across individuals under the assumption of homogeneous preferences?" Crucially, in answering these questions, we take into account the power of budget sets faced by each household to expose failures of rationality. To summarize our results we ?nd that: (i) while observed violations of rationality are small in absolute terms, our households are only moderately more rational than the benchmark of random choice; (ii) there are signi?cant di¤erences in the rationality of di¤erent groups, with multi-head households more rational than single head households, and the youngest households more rational than middle age households; (iii) the assumption of homogenous preferences is strongly rejected: choice data that is aggregated across households exhibits high levels of irrationality.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2011-11.

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Date of creation: 2011
Date of revision:
Handle: RePEc:bro:econwp:2011-11
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Syngjoo Choi & Shachar Kariv & Wieland M?ller & Dan Silverman, 2014. "Who Is (More) Rational?," American Economic Review, American Economic Association, vol. 104(6), pages 1518-50, June.
  2. Mark Aguiar & Erik Hurst, 2007. "Life-Cycle Prices and Production," American Economic Review, American Economic Association, vol. 97(5), pages 1533-1559, December.
  3. Stefan Hoderlein, 2009. "How Many Consumers are Rational?," Boston College Working Papers in Economics 748, Boston College Department of Economics.
  4. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers W97/14, Institute for Fiscal Studies.
  5. James Andreoni & William Harbaugh, 2005. "Power Indicies for Revealed Preference Tests," Levine's Bibliography 784828000000000181, UCLA Department of Economics.
  6. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  7. Ray Fisman & Shachar Kariv & Daniel Markovits, 2006. "Individual Preferences for Giving," Levine's Bibliography 666156000000000468, UCLA Department of Economics.
  8. Jose Apesteguia & Miguel Angel Ballester, 2015. "A Measure of Rationality and Welfare," Working Papers 573, Barcelona Graduate School of Economics.
  9. Cherchye, Laurens & De Rock, Bram & Sabbe, Jeroen & Vermeulen, Frederic, 2008. "Nonparametric tests of collectively rational consumption behavior: An integer programming procedure," Journal of Econometrics, Elsevier, vol. 147(2), pages 258-265, December.
  10. Fabrice Talla Nobibon & Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frits Spieksma, 2011. "Heuristics for deciding collectively rational consumption behavior," ULB Institutional Repository 2013/131710, ULB -- Universite Libre de Bruxelles.
  11. Stefan Hoderlein & Jörg Stoye, 2014. "Revealed Preferences in a Heterogeneous Population," The Review of Economics and Statistics, MIT Press, vol. 96(2), pages 197-213, May.
  12. Bronars, Stephen G, 1987. "The Power of Nonparametric Tests of Preference Maximization [The Nonparametric Approach to Demand Analysis]," Econometrica, Econometric Society, vol. 55(3), pages 693-98, May.
  13. Richard Blundell & Martin Browning & Ian Crawford, 2005. "Best nonparametric bounds on demand responses," CeMMAP working papers CWP12/05, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  14. Gil Kalai & Ariel Rubinstein & Ran Spiegler, 2002. "Rationalizing Choice Functions By Multiple Rationales," Econometrica, Econometric Society, vol. 70(6), pages 2481-2488, November.
  15. Gross, John, 1995. "Testing Data for Consistency with Revealed Preference," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 701-10, November.
  16. Tim Beatty & Ian Crawford, 2010. "How demanding is the revealed preference approach to demand," CeMMAP working papers CWP17/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  17. 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.
  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.
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