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Choice, Rationality and Welfare Measurement

  • Green, Jerry

    (Harvard U)

  • Hojman, Daniel

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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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-054.

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Date of creation: Nov 2007
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Handle: RePEc:ecl:harjfk:rwp07-054
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  1. 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.
  2. Francoise Forges & Enrico Minelli, 2006. "Afriat's Theorem for General Budget Sets," Working Papers ubs0609, University of Brescia, Department of Economics.
  3. Saari, Donald G., 1989. "A dictionary for voting paradoxes," Journal of Economic Theory, Elsevier, vol. 48(2), pages 443-475, August.
  4. 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.
  5. Paola Manzini & Marco Mariotti, 2004. "Rationalizing Boundedly Rational Choice," Microeconomics 0407005, EconWPA, revised 21 Jul 2005.
  6. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
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