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Are Consumers Rational ?Shifting the Burden of Proof

Author

Listed:
  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock
  • Joshua Lanier

Abstract

We present a statistical test for the hypothesis of rational utility maximization on the basis of nonparametric revealed preference conditions. Our test is conservative for the utility maximization hypothesis. We take as null hypothesis that the consumer behaves randomly, and as alternative hypothesis that she is approximately utility maximizing. Our statistical test uses a permutation method to operationalize the principle of random consumer behavior. We show that the test has an asymptotic power of one against the alternative hypothesis of approximately utility maximizing behavior. We also provide simulated power results and two empirical applications (to experimental and observational data, respectively).

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Joshua Lanier, 2020. "Are Consumers Rational ?Shifting the Burden of Proof," Working Papers ECARES 2020-19, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/307516
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    References listed on IDEAS

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    Cited by:

    1. Mikhail Freer & Marco Castillo, 2021. "A General Revealed Preference Test for Quasilinear Preferences: Theory and Experiments," Papers 2111.01248, arXiv.org, revised Dec 2022.
    2. Demuynck, Thomas & Salman, Umutcan, 2022. "On the revealed preference analysis of stable aggregate matchings," Theoretical Economics, Econometric Society, vol. 17(4), November.
    3. Marco Castillo & Mikhail Freer, 2023. "A general revealed preference test for quasilinear preferences: theory and experiments," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 673-696, July.
    4. Federico Echenique, 2021. "On the meaning of the Critical Cost Efficiency Index," Papers 2109.06354, arXiv.org, revised Apr 2022.

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    More about this item

    Keywords

    utility maximization; revealed preferences; random behavior; permutation test;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General

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