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A comprehensive revealed preference approach to approximate utility maximisation

Author

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  • Pawel Dziewulski

    (University of Sussex)

Abstract

We develop a comprehensive revealed preference method for studying approximate utility maximisation, where an alternative is selected from a menu only if its utility is not significantly lower than that of any other available option. We show that this model characterises choices that violate transitivity of indifferences, but preserve transitivity of the revealed strict preferences. More importantly, although the individual may fail to maximise their utility exactly, it is possible to recover their true preferences from the observable data, make out-of-sample predictions and welfare comparisons. Our results require minimal assumptions on the empirical framework and are applicable, amongst others, to the study of choices over consumption bundles, state-contingent consumption, and lotteries.

Suggested Citation

  • Pawel Dziewulski, 2021. "A comprehensive revealed preference approach to approximate utility maximisation," Working Paper Series 0621, Department of Economics, University of Sussex Business School.
    • Handle: RePEc:sus:susewp:0621
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    File URL: https://www.sussex.ac.uk/business-school/documents/wps-06-2021.pdf
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    References listed on IDEAS

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    Cited by:

    1. Wang, Kai, 2022. "Approval with frames," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    2. Aguiar, Victor H. & Hjertstrand, Per & Serrano, Roberto, 2020. "A Rationalization of the Weak Axiom of Revealed Preference," Working Paper Series 1321, Research Institute of Industrial Economics.
    3. Luca Rigotti & Arie Beresteanu, 2021. "Identification of Incomplete Preferences," Papers 2108.06282, arXiv.org, revised Jun 2022.

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    More about this item

    Keywords

    approximate utility maximisation; revealed preference analysis; nontransitive indifferences; recoverability of preferences; interval order;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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