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Beyond the Mean : Testing Consumer Rationality through Higher Moments of Demand

Author

Listed:
  • Maes, Sebastiaan

    (University of Antwerp)

  • Malhotra, Raghav

    (University of Leicester)

Abstract

We study a setting where an analyst has access to purely aggregate information about the consumption choices of a heterogenous population of individuals. We show that observing the statistical moments of market demand allows the analyst to test aggregate data for rationality. Interestingly, just the mean and variance of demand carry observable restrictions. This is in stark contrast to impossibility result of the Sonnenschein-Mantel-Debreu theorem, which shows that aggregate demand carries no observable restrictions at all. We leverage our approach to deliver a characterization of rationality in terms of moments for the common twogood case. We illustrate the usefulness of moment-based restrictions through two applications: (i) improving the precision of demand and welfare estimates; and (ii) testing for the existence of a welfare-relevant representative consumer.

Suggested Citation

  • Maes, Sebastiaan & Malhotra, Raghav, 2024. "Beyond the Mean : Testing Consumer Rationality through Higher Moments of Demand," CRETA Online Discussion Paper Series 85, Centre for Research in Economic Theory and its Applications CRETA.
    • Handle: RePEc:wrk:wcreta:85
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/centres/creta/papers/manage/creta85_-_sebastian_maes.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    consumer demand ; moments of demand ; stochastic rationalizability JEL codes: C14 ; C31 ; D11 ; D12 ; D63;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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