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What Do Revealed Preference Axioms Reveal about Elasticities of Demand?

  • Hjertstrand, Per

    ()

    (Research Institute of Industrial Economics (IFN))

  • Jones, Barry E.

    ()

    (Department of Economics)

It is well-known that observed data on prices and quantities of a set of goods is consistent with rational choice if the data satisfy revealed preference. In this paper, we derive estimators for demand and substitution elasticities at the observed data points for datasets satisfying the Strong version of the Strong Axiom of Revealed Preference (SSARP) from Chiappori and Rochet (1987). We find that these estimators are identified only up to a strictly positive parameter, which must be small enough that the utility function rationalizing the dataset satisfies certain properties. We show that the estimated elasticities of substitution approach zero in the limit as this parameter approaches zero. Thus, if the dataset satisfies SSARP, then it is consistent with negligible substitutability between any pair of goods at all observed data points. Our estimators are derived directly from results in Brown and Shannon (2000) and Brown and Kannan (2005).

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 972.

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Length: 16 pages
Date of creation: 04 Sep 2013
Date of revision:
Handle: RePEc:hhs:iuiwop:0972
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
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  1. Laurens CHERCHYE & Thomas DEMUYNCK & Bram DE ROCK, 2011. "Revealed preference tests for weak separability: an integer programming approach," Center for Economic Studies - Discussion papers ces11.25, Katholieke Universiteit Leuven, Centrum voor Economische Studiƫn.
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  8. Richard Blundell & Martin Browning & Ian Crawford, 2005. "Best nonparametric bounds on demand responses," CeMMAP working papers CWP12/05, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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  11. William Barnett & Apostolos Serletis, 2009. "Measuring Consumer Preferences and Estimating Demand Systems," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200901, University of Kansas, Department of Economics, revised Jan 2009.
  12. Barnett, William A. & Serletis, Apostolos, 2008. "Consumer preferences and demand systems," MPRA Paper 8413, University Library of Munich, Germany.
  13. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
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  18. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
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  26. repec:ecj:econjl:v:122:y:2012:i::p:332-338 is not listed on IDEAS
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