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How demanding is the revealed preference approach to demand

  • Tim Beatty

    ()

    (Institute for Fiscal Studies and University of York)

  • Ian Crawford

    ()

    (Institute for Fiscal Studies and University of Oxford)

A well known problem with revealed preference methods is that when data are found to satisfy their restrictions it is hard to know whether this should be viewed as a triumph for economic theory, or a warning that these conditions are so undemanding that almost anything goes. This paper allows researchers to make this distinction. Our approach builds on theoretical support in the form of an axiomatic cardinal characterisation of a measure of predictive success due to Selten(1991). We illustrate the idea using a large, nationally representative panel survey of Spanish consumers with broad commodity coverage. The results show that this approach to revealed preference methods can lead us radically to reassess our view of the empirical performance of economic theory.

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File URL: http://cemmap.ifs.org.uk/wps/cwp1710.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP17/10.

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Date of creation: Jun 2010
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Handle: RePEc:ifs:cemmap:17/10
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  1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  2. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  3. Bronars, Stephen G, 1987. "The Power of Nonparametric Tests of Preference Maximization [The Nonparametric Approach to Demand Analysis]," Econometrica, Econometric Society, vol. 55(3), pages 693-98, May.
  4. Diewert, W E, 1973. "Afriat and Revealed Preference Theory," Review of Economic Studies, Wiley Blackwell, vol. 40(3), pages 419-25, July.
  5. Cherchye, L.J.H. & de Rock, B. & Vermeulen, F.M.P., 2007. "The collective model of household consumption : A nonparametric characterization," Other publications TiSEM 0a104373-4fb6-4ef2-9d2b-2, Tilburg University, School of Economics and Management.
  6. Sippel, Reinhard, 1997. "An Experiment on the Pure Theory of Consumer's Behaviour," Economic Journal, Royal Economic Society, vol. 107(444), pages 1431-44, September.
  7. Laura Blow & Martin Browning & Ian Crawford, 2008. "Revealed Preference Analysis of Characteristics Models," Review of Economic Studies, Oxford University Press, vol. 75(2), pages 371-389.
  8. Famulari, Melissa, 1995. "A Household-Based, Nonparametric Test of Demand Theory," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 372-82, May.
  9. M. Keith Chen & Venkat Lakshminarayanan & Laurie R. Santos, 2006. "How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 517-537, June.
  10. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
  11. Aizcorbe, Ana M, 1991. "A Lower Bound for the Power of Nonparametric Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 463-67, October.
  12. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
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  1. How Demanding Is the Revealed Preference Approach to Demand? (AER 2011) in ReplicationWiki

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