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The revealed preference approach to collective consumption behavior: testing, recovery and welfare analysis

  • Laurens CHERCHYE
  • Bram DE ROCK
  • Frederic VERMEULEN

We extend the nonparametric ‘revealed preference’ methodology for analyzing collective consumption behavior (with consumption externalities and public consumption), to render it useful for empirical applications that deal with welfare-related questions. First, we provide a nonparametric necessary and sufficient condition for collectively rational group behavior that incorporates the possibility of assignable quantity information. This characterizes collective rationality in terms of feasible personalized prices, personalized quantities and income shares (representing the underlying sharing rule). Subsequently, we present nonparametric testing tools for data consistency with special cases of the collective model, which impose specific structure on the preferences of the group members (in terms of consumption externalities and public consumption); and we show that these testing tools in turn allow for nonparametrically recovering (bounds on) feasible personalized prices, personalized quantities and income shares that underlie observed (collectively rational) group behavior. In addition, we present formally similar testing and recovery tools for the general collective consumption model, which imposes minimal a priori structure. Interestingly, the proposed testing and recovery methodology can be implemented through integer programming (IP and MILP), which is attractive for practical applications. Finally, while we argue that assignable quantity information generally entails more powerful recovery results, we also demonstrate that precise nonparametric recovery (i.e. tight bounds) can be obtained even if no assignable quantity information is available.

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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces0724.

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Date of creation: Sep 2007
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Handle: RePEc:ete:ceswps:ces0724
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  1. Richard Blundell & Robin, J M, 1995. "Latent separability: grouping goods without weak separability," IFS Working Papers W95/09, Institute for Fiscal Studies.
  2. Chiappori, P.A. & Ekeland, I., 2006. "The micro economics of group behavior: General characterization," Journal of Economic Theory, Elsevier, vol. 130(1), pages 1-26, September.
  3. Martin Browning & P.A. Chiappori, 1996. "Efficient Intra-Household Allocations - A General Characterization and Empirical Tests," Discussion Papers 96-10, University of Copenhagen. Department of Economics.
  4. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
  5. Cherchye, L.J.H. & de Rock, B. & Vermeulen, F.M.P., 2004. "The Collective Model of Household Consumption : A Nonparametric Characterization," Discussion Paper 2004-76, Tilburg University, Center for Economic Research.
  6. Donald J. Brown & Chris Shannon, 2000. "Uniqueness, Stability, and Comparative Statics in Rationalizable Walrasian Markets," Econometrica, Econometric Society, vol. 68(6), pages 1529-1540, November.
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  8. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers W97/14, Institute for Fiscal Studies.
  9. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
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  11. Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frederic Vermeulen, 2008. "Nonparametric tests of collectively rational consumption behavior: an integer programming procedure," Working Papers ECARES 2008-001, ULB -- Universite Libre de Bruxelles.
  12. Donald J. Brown & Rosa L. Matzkin, 1995. "Testable Restrictions on the Equilibrium Manifold," Cowles Foundation Discussion Papers 1109, Cowles Foundation for Research in Economics, Yale University.
  13. Chiappori, Pierre-Andre, 1992. "Collective Labor Supply and Welfare," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 437-67, June.
  14. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  15. Browning, M. & Bourguignon, F. & Chiappori, P.A. & Lechene, V., 1992. "Incomes and Outcomes: A structural Model of Intra-Household Allocation," DELTA Working Papers 92-23, DELTA (Ecole normale supérieure).
  16. Richard Blundell & Pierre-André Chiappori & Costas Meghir, 2005. "Collective Labor Supply with Children," Journal of Political Economy, University of Chicago Press, vol. 113(6), pages 1277-1306, December.
  17. James Andreoni & William T. Harbaugh, 2006. "Power Indices for Revealed Preference Tests," Levine's Bibliography 122247000000001257, UCLA Department of Economics.
  18. Lewbel, Arthur & Pendakur, Krishna, 2008. "Estimation of collective household models with Engel curves," Journal of Econometrics, Elsevier, vol. 147(2), pages 350-358, December.
  19. Valérie Lechene & Ian Preston, 2007. "Demand properties in household Nash equilibrium," IFS Working Papers W07/01, Institute for Fiscal Studies.
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