Choice, Rationality and Welfare Measurement
We present a method for evaluating the welfare of a decision maker, based on observed choice data. Unlike the standard economic theory of revealed preference, our method can be used whether or not the observed choices are rational. Paralleling the standard theory we present a model for choice such that the observations arise "as if" they were the result of a specific decision making process. However, in place of the usual preference relation whose maximization induces the observations, we explain choice as arising from a compromise among a set of simultaneously held, conflicting preference relations. As in revealed preference theory, these simultaneously held preferences are inferred from the choice data and we use them as the basis to discuss the decision maker’s welfare. In general our method does not yield a unique set of explanatory preferences and therefore we characterize all the explanatory sets of preferences. We use this set to compute bounds on welfare changes. We show that some standard results of rational choice theory can be extended to irrational decision makers. The theory can be used to explore a number of context-dependent choice patterns found in psychological experiments.
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- Francoise Forges & Enrico Minelli, 2006.
"Afriat's Theorem for General Budget Sets,"
ubs0609, University of Brescia, Department of Economics.
- Forges, Françoise & Minelli, Enrico, 2009. "Afriat's theorem for general budget sets," Economics Papers from University Paris Dauphine 123456789/4099, Paris Dauphine University.
- Francoise Forges & Enrico Minelli, 2006. "Afriat’s Theorem for General Budget Sets," CESifo Working Paper Series 1703, CESifo Group Munich.
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"Two New Proofs of Afriat's Theorem,"
Econometric Society 2004 North American Summer Meetings
632, Econometric Society.
- Herbert E. Scarf & Ana Fostel & Michael J. Todd, 2004. "Two New Proofs of Afriat's Theorem," Yale School of Management Working Papers ysm377, Yale School of Management.
- Anna Fostel & Herbert E. Scarf & Michael J. Todd, 2003. "Two New Proofs of Afriat's Theorem," Cowles Foundation Discussion Papers 1415, Cowles Foundation for Research in Economics, Yale University.
- Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
- Saari, Donald G., 1989. "A dictionary for voting paradoxes," Journal of Economic Theory, Elsevier, vol. 48(2), pages 443-475, August.
- Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
- David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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