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The Money Pump as a Measure of Revealed Preference Violations: a Comment

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  • Laurens Cherchye
  • Bram De Rock
  • Bart Smeulders
  • Frits Spieksma

Abstract

In a recent and insightful paper, Echenique et al. [4] proposed the Money Pump Index(MPI) as an intuitive measure to evaluate the severity of violations of consumer rationality(defined in terms of revealed preference axioms). For practical applications, they suggest usingthe Mean or Median MPI. In this note, we show that computing these Median and Mean MPIis computationally hard, which makes them impractical in the case of large datasets (including"scanner" datasets as the one used by Echenique et al.). To overcome this problem, we proposeMaximum and Minimum MPIs as easy-to-apply alternatives. These MPIs preserve the intuitionof the Median and Mean MPIs and can be computed efficiently (i.e. in polynomial time). Wealso show the practical usefulness of the Maximum and Minimum MPI through an applicationto the dataset of Echenique et al..

Suggested Citation

  • Laurens Cherchye & Bram De Rock & Bart Smeulders & Frits Spieksma, 2013. "The Money Pump as a Measure of Revealed Preference Violations: a Comment," Working Papers ECARES ECARES 2013-30, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/146734
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    References listed on IDEAS

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    1. 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.
    2. Bram De Rock & Bart Smeulders & Laurens Cherchye & Frits Spieksma, 2013. "Goodness of fit measures for revealed preference tests: Complexity results and algorithms," ULB Institutional Repository 2013/162939, ULB -- Universite Libre de Bruxelles.
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    Cited by:

    1. repec:wly:econjl:v:126:y:2016:i:598:p:2424-2445 is not listed on IDEAS
    2. Shiozawa, Kohei, 2016. "Revealed preference test and shortest path problem; graph theoretic structure of the rationalizability test," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 38-48.
    3. Kohei Shiozawa, 2015. "Note on goodness-of-fit measures for the revealed preference test: The computational complexity of the minimum cost index," Economics Bulletin, AccessEcon, vol. 35(4), pages 2455-2461.
    4. Drichoutis, Andreas C. & Nayga, Rodolfo, 2017. "Economic rationality under cognitive load," MPRA Paper 81111, University Library of Munich, Germany.
    5. Nikolay Klemashev & Alexander Shananin, 2015. "Positively-homogeneous Konus-Divisia indices and their applications to demand analysis and forecasting," Papers 1501.05771, arXiv.org.
    6. Kohei Shiozawa, 2015. "Revealed Preference Test and Shortest Path Problem; Graph Theoretic Structure of the Rationalizability Test," Discussion Papers in Economics and Business 15-17-Rev., Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Jul 2015.
    7. Maria Porter, 2014. "For Love or Reward? Characterising Preferences for Giving to Parents in an Experimental Setting," Economics Series Working Papers 709, University of Oxford, Department of Economics.
    8. repec:eee:jeborg:v:145:y:2018:i:c:p:202-217 is not listed on IDEAS
    9. Maria Porter & Abi Adams, 2016. "For Love or Reward? Characterising Preferences for Giving to Parents in an Experimental Setting," Economic Journal, Royal Economic Society, vol. 126(598), pages 2424-2445, December.
    10. Daniel M�ller, 2017. "The anatomy of distributional preferences with group identity," Working Papers 2017-02, Faculty of Economics and Statistics, University of Innsbruck, revised Mar 2017.
    11. Kohei Shiozawa, 2015. "Revealed Preference Test and Shortest Path Problem; Graph Theoretic Structure of the Rationalizability Test," Discussion Papers in Economics and Business 15-17-Rev.2, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2016.

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