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Sharp for SARP: nonparametric bounds on the behavioural and welfare effects of price changes

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  • Richard BLUNDELL
  • Martin BROWNING
  • Laurens CHERCHYE
  • Ian CRAWFORD
  • Bram DE ROCK
  • Frederic VERMEULEN

Abstract

Sharp nonparametric bounds are derived for Hicksian compensating and equivalent variations. These “i-bounds” generalize earlier results of Blundell, Browning and Crawford (2008). We show that their e-bounds are sharp under the Weak Axiom of Revealed Preference (WARP). They do not require transitivity. The new i-bounds are sharp under the Strong Axiom of Revealed Preference (SARP). By requiring transitivity they can be used to bound welfare measures. The new bounds on welfare measures are shown to be operationalized through algorithms that are easy to implement.

Suggested Citation

  • Richard BLUNDELL & Martin BROWNING & Laurens CHERCHYE & Ian CRAWFORD & Bram DE ROCK & Frederic VERMEULEN, 2012. "Sharp for SARP: nonparametric bounds on the behavioural and welfare effects of price changes," Working Papers of Department of Economics, Leuven ces12.11, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
  • Handle: RePEc:ete:ceswps:ces12.11
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    References listed on IDEAS

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    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Richard W. Blundell & Martin Browning & Ian A. Crawford, 2003. "Nonparametric Engel Curves and Revealed Preference," Econometrica, Econometric Society, vol. 71(1), pages 205-240, January.
    3. Hugh Rose, 1958. "Consistency of Preference: The Two-Commodity Case," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 124-125.
    4. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    5. Richard Blundell & Martin Browning & Ian Crawford, 2008. "Best Nonparametric Bounds on Demand Responses," Econometrica, Econometric Society, vol. 76(6), pages 1227-1262, November.
    6. Richard Blundell, 2005. "Presidential Address: How Revealing Is Revealed Preference?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 211-235, 04/05.
    7. Kihlstrom, Richard E & Mas-Colell, Andreu & Sonnenschein, Hugo, 1976. "The Demand Theory of the Weak Axiom of Revealed Preference," Econometrica, Econometric Society, vol. 44(5), pages 971-978, September.
    8. W. E. Diewert, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Oxford University Press, vol. 40(3), pages 419-425.
    9. Samuelson, Paul A, 1974. "Complementarity-An Essay on the 40th Anniversary of the Hicks-Allen Revolution in Demand Theory," Journal of Economic Literature, American Economic Association, vol. 12(4), pages 1255-1289, December.
    10. Richard Blundell & Martin Browning & Ian Crawford, 2007. "Improving Revealed Preference Bounds On Demand Responses," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1227-1244, November.
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    Cited by:

    1. Sam Cosaert & Thomas Demuynck, 2018. "Nonparametric Welfare and Demand Analysis with Unobserved Individual Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 349-361, May.
    2. Yuichi Kitamura & Jorg Stoye, 2013. "Nonparametric Analysis of Random Utility Models: Testing," Cowles Foundation Discussion Papers 1902, Cowles Foundation for Research in Economics, Yale University.
    3. Cherchye, Laurens & Demuynck, Thomas & De Rock, Bram, 2018. "Transitivity of preferences: when does it matter?," Theoretical Economics, Econometric Society, vol. 13(3), September.
    4. Abi Adams & Richard Blundell & Martin Browning & Ian Crawford, 2015. "Prices versus preferences: taste change and revealed preference," IFS Working Papers W15/11, Institute for Fiscal Studies.
    5. Cherchye, Laurens & Demuynck, Thomas & Rock, Bram De, 2019. "Bounding counterfactual demand with unobserved heterogeneity and endogenous expenditures," Journal of Econometrics, Elsevier, vol. 211(2), pages 483-506.
    6. Abi Adams, 2015. "Mutually consistent revealed preference bounds," IFS Working Papers W15/20, Institute for Fiscal Studies.
    7. Daniel L. McFadden, 2013. "The New Science of Pleasure," NBER Working Papers 18687, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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