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A Geometric Measure for the Violation of Utility Maximization

  • Jan Heufer

    ()

Revealed Preference offers nonparametric tests for whether consumption observations can be rationalized by a utility function. If a consumer is inconsistent with GARP, we might need a measure for the severity of inconsistency. One widely used measure is the Afriat efficiency index (AEI).We propose a new measure based on the extent to which the indifference surfaces intersect the budget hyperplanes. The measure is intuitively appealing and, as a cutoff- rule evaluated by Monte Carlo experiments, performs very well compared to the AEI. The results suggest that the new measure is better suited to capture small deviations from utility maximation.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0069.

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Length: 27 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:rwi:repape:0069
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  1. 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.
  2. Douglas M. Gale & Shachar Kariv & Syngjoo Choi & Raymond Fisman, 2007. "Revealing Preferences Graphically: An Old Method Gets a New Tool Kit," American Economic Review, American Economic Association, vol. 97(2), pages 153-158, May.
  3. Swofford, James L & Whitney, Gerald A, 1987. "Nonparametric Tests of Utility Maximization and Weak Separability for Consumption, Leisure and Money," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 458-64, August.
  4. Fleissig, Adrian R & Whitney, Gerald A, 2003. "A New PC-Based Test for Varian's Weak Separability Conditions," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 133-44, January.
  5. James Andreoni & John Miller, 2002. "Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism," Econometrica, Econometric Society, vol. 70(2), pages 737-753, March.
  6. Mattei, Aurelio, 2000. "Full-scale real tests of consumer behavior using experimental data," Journal of Economic Behavior & Organization, Elsevier, vol. 43(4), pages 487-497, December.
  7. McMillan, Melville L & Amoako-Tuffour, Joe, 1988. "An Examination of Preferences for Local Public Sector Outputs," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 45-54, February.
  8. Knoblauch, Vicki, 1992. "A Tight Upper Bound on the Money Metric Utility Function," American Economic Review, American Economic Association, vol. 82(3), pages 660-63, June.
  9. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-73, July.
  10. 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.
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