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Real Income Growth And Revealed Preference Inconsistency

  • David Jerison

    ()

  • Michael Jerison

    ()

If a smooth demand function violates the strong axiom of revealed preference, the income and prices can follow a cycle and returm to their starting values even though real income is always rising. We show how real income growth along the “worst” revealed preference cycle depends on the range of price variation and on violations of the Slutsky conditions. We relate this result to proposed reforms of the consumer price index and use it to justify a new index of local demand inconsistency. We also use the Slutsky matrix to determine an upper bound on the number of observations required to detect revealed preference inconsistency.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we012902.

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Date of creation: May 2001
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Handle: RePEc:cte:werepe:we012902
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  1. Jerison, David & Jerison, Michael, 1992. "Approximately rational consumer demand and ville cycles," Journal of Economic Theory, Elsevier, vol. 56(1), pages 100-120, February.
  2. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  3. Afriat, S N, 1973. "On a System of Inequalities in Demand Analysis: An Extension of the Classical Method," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 460-72, June.
  4. Mattei, Aurelio, 2000. "Full-scale real tests of consumer behavior using experimental data," Journal of Economic Behavior & Organization, Elsevier, vol. 43(4), pages 487-497, December.
  5. Browning, M. & Chiappori, P.A., 1994. "Efficient Intra-Household allocations: A General Characterization and Empirical Tests," DELTA Working Papers 94-16, DELTA (Ecole normale supérieure).
  6. Sen, A., 1996. "Maximisation and the Act of Choice," Papers 270, Banca Italia - Servizio di Studi.
  7. Jerison, Michael, 1994. "Optimal Income Distribution Rules and Representative Consumers," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 739-71, October.
  8. Hurwicz, Leonid & Richter, Marcel K, 1979. "Ville Axioms and Consumer Theory," Econometrica, Econometric Society, vol. 47(3), pages 603-19, May.
  9. Richter, Marcel K., 1979. "Duality and rationality," Journal of Economic Theory, Elsevier, vol. 20(2), pages 131-181, April.
  10. Shafer, Wayne J., 1977. "Revealed preference cycles and the slutsky matrix," Journal of Economic Theory, Elsevier, vol. 16(2), pages 293-309, December.
  11. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  12. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
  13. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  14. Koo, Anthony Y C & Hasenkamp, Georg, 1972. "Structure of Revealed Preference: Some Preliminary Evidence," Journal of Political Economy, University of Chicago Press, vol. 80(4), pages 724-44, July-Aug..
  15. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
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