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Choice, Rationality and Welfare Measurement

Author

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  • Green, Jerry

    (Harvard U)

  • Hojman, Daniel

Abstract

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.

Suggested Citation

  • Green, Jerry & Hojman, Daniel, 2007. "Choice, Rationality and Welfare Measurement," Working Paper Series rwp07-054, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp07-054
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    File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=5091&type=WPN
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    References listed on IDEAS

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    5. Saari, Donald G., 1989. "A dictionary for voting paradoxes," Journal of Economic Theory, Elsevier, vol. 48(2), pages 443-475, August.
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    Citations

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    Cited by:

    1. Jerry R. Green & Daniel Hojman, 2015. "Monotonic Aggregation of Preferences and the Rationalization of Choice Functions," Working Papers wp397, University of Chile, Department of Economics.
    2. Attila Ambrus & Kareen Rozen, 2015. "Rationalising Choice with Multi‐self Models," Economic Journal, Royal Economic Society, vol. 125(585), pages 1136-1156, June.
    3. Ivan Soraperra, 2009. "Revealed Preferences, Choices, and Psychological Indexes," Working Papers 643, Queen Mary University of London, School of Economics and Finance.
    4. Nakajima, Daisuke & Masatlioglu, Yusufcan, 2013. "Choice by iterative search," Theoretical Economics, Econometric Society, vol. 8(3), September.
    5. Daniel Hojman & Alvaro Miranda & Jaime Ruiz-Tagle, 2013. "Over Indebtedness and Depression: Sad Debt or Sad Debtors?," Working Papers wp385, University of Chile, Department of Economics.
    6. Jose Apesteguia & Miguel A. Ballester, 2015. "A Measure of Rationality and Welfare," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1278-1310.
    7. de Clippel, Geoffroy & Eliaz, Kfir, 2012. "Reason-based choice: a bargaining rationale for the attraction and compromise effects," Theoretical Economics, Econometric Society, vol. 7(1), January.
    8. Danan, Eric & Gajdos, Thibault & Tallon, Jean-Marc, 2013. "Aggregating sets of von Neumann–Morgenstern utilities," Journal of Economic Theory, Elsevier, vol. 148(2), pages 663-688.
    9. Yusufcan Masatlioglu & Daisuke Nakajima & Erkut Y. Ozbay, 2012. "Revealed Attention," American Economic Review, American Economic Association, pages 2183-2205.
    10. Shaikh, Salman Ahmed, 2015. "Islamic Approach to Environmental Sustainability: Review of Worldview, Philosophy & Teachings," MPRA Paper 68747, University Library of Munich, Germany.
    11. Dalton, P.S. & Ghosal, S., 2010. "Behavioral Decisions and Welfare (Replaces CentER DP 2010-22)," Discussion Paper 2010-143, Tilburg University, Center for Economic Research.
    12. Dalton, Patricio & Ghosal, Sayantan, 2008. "Behavioural Decisions and Welfare," The Warwick Economics Research Paper Series (TWERPS) 834, University of Warwick, Department of Economics.
    13. Vadim Cherepanov & Tim Feddersen & Alvaro Sandroni, 2013. "Revealed preferences and aspirations in warm glow theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 501-535, November.
    14. Sandroni, Alvaro & Cherepavov, Vadim & Feddersen, Timothy, 2013. "Rationalization," Theoretical Economics, Econometric Society, vol. 8(3), September.
    15. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers 07-031, Stanford Institute for Economic Policy Research.
    16. Attila Ambrus & Kareen Rozen, 2008. "Revealed Conflicting Preferences," Levine's Working Paper Archive 122247000000002161, David K. Levine.
    17. Erik Angner, 2011. "Current Trends in Welfare Measurement," Chapters,in: The Elgar Companion to Recent Economic Methodology, chapter 6 Edward Elgar Publishing.
    18. Chambers, Christopher P. & Hayashi, Takashi, 2012. "Choice and individual welfare," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1818-1849.
    19. Raj Chetty, 2009. "The Simple Economics of Salience and Taxation," NBER Working Papers 15246, National Bureau of Economic Research, Inc.
    20. Nishimura, Hiroki & Ok, Efe A., 2014. "Non-existence of continuous choice functions," Journal of Economic Theory, Elsevier, vol. 153(C), pages 376-391.
    21. Noor, Jawwad, 2013. "Removed preferences," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1463-1486.
    22. repec:hal:cesptp:halshs-00788647 is not listed on IDEAS
    23. Xiangyu Qu, 2016. "Commitment and anticipated utilitarianism," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 47(2), pages 349-358, August.

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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