Revealed Preference Method Research Articles

Are Individual Preferences for Public Spending Consistent with GARP?

The aim of this paper is to test the consistency of individual preferences for publicly provided goods with utility maximisation hypothesis. For this purpose, we rely on the non-parametric revealed preference method. A budget game experiment was conducted on a large sample of Italian households in order to collect information about individual preferences for public expenditure programmes. We tested the cross sectional data on public expenditure/private goods choice for their consistency with GARP. The initial results on the complete sample gave some support to the rejection of utility maximisation paradigm. However, when we applied a hierarchical clustering procedure in order to take into account the heterogeneity of preferences across households, the results turned to be rather different: we found strong support for the utility maximisation hypothesis in almost all the clusters considered. Above all, we found that the revealed preference tests are sensitive to the degree of aggregation in the sample, in the sense that households with similar socio-demographic traits seem to make choices for public spending that are more consistent with revealed preference.

Functional Analysis of Intermittently Reinforced Behaviour: A Case Study

AbstractFunctional analysis is used to identify potential reinforcers by generating hypotheses about possible functions of a behaviour. Current methods of functional analysis emphasise observations of events, especially consequences, that occur in the immediate environment of the behaviour. While these methods are well suited for assessing behaviour that is reinforced frequently, they are less appropriate for assessing behaviour that is reinforced only intermittently. A new method for conducting functional analysis is presented that is designed to assess intermittently reinforced behaviour. The new method is illustrated using data that were gathered from an extension of a standard problem-solving format. Data are interpreted using the principle of revealed preference that arose from behavioural economics. The revealed preference method is illustrated using information provided by a client with a dependent personality disorder.

The Median Voter according to GARP

This paper adapts the generalized axiom of revealed preference (GARP) empirical method to the public goods problem to test whether observed municipal public spending can be explained "as if" the city governments maximize the utility of the median income voter. It applies the test procedure for medium-size municipal governments in five Midwest states. The data are consistent with GARP and reveal that the local governments in the sample behave as if they maximize median voter utility once we control for the state-specific effects, government management structure, and population density. The median voter hypothesis is the proposition that local governments behave "as if" they maximize the utility of the median income voter in the jurisdiction. Although an important tool in public economic analysis, there has been no conclusive direct test of the maximization hypothesis to date. Revealed preference theory shows that any finite set of price and quantity observations satisfying the generalized axiom of revealed preference (GARP) can be rationalized by the constrained maximization of an increasing, continuous, concave utility function (Afriat 1967, 1973; Varian 1982). This paper adapts the revealed preference method to the public goods problem in order to test municipal spending data for consistency under GARP, thereby providing the first direct test of whether or not the local governments behave "as if" they maximize median voter utility. The median voter hypothesis represents a simple tool that is the most widely used characterization of local government behavior. Given its prominence in the literature, it is not surprising that the hypothesis itself has become the subject of scrutiny. The framework assumes direct or representative democracy without strategic behavior, in which competition among politicians ensures that the public sector bureaucracy responds efficiently to voters' desires. Public sector decision making reduces to an "as if" constrained maximization problem, a simplified picture of the outcome of collective action. Still, much of the empirical testing literature is motivated by concerns over whether the model is too simplistic. Nonetheless, it can be argued that, given its depiction as an "as if" outcome, the median voter hypothesis should be judged not by its descriptive accuracy of the public sector decision process but instead by how well it explains observed local fiscal choices. On this basis, the existing empirical evidence, although mixed, reveals a surprising amount of indirect support for the framework. One approach taken in the literature is to evaluate the median voter hypothesis by testing the predictive power of regression equations with median income and tax price terms for explaining state or local fiscal behavior. In this line of the

Using Donation Mechanisms to Value Nonuse Benefits from Public Goods

This paper discusses an experiment in which the value for an unfamiliar environmental good, whose total value has a large nonuse component, is verified using a revealed-preference method. As we were unable to observe preferences via an incentive compatible mechanism, we collected voluntary contributions toward the provision of the good. We make a case for interpreting these contributions as a “theoretical lower bound” on the value of the public good and estimate the lower bound. We also investigate whether we can use contingent donation data to estimate such lower bounds on values. We used a follow-up to the contingent donation question about the respondent's level of certainty with respect to her response to the contingent donation question. The results of this study suggest that use of the follow-up certainty question to differentiate respondents who would actually donate from those who would not is a promising approach to estimating a lower bound to Hicksian surplus measures.

The theory of approximate prices: Analytical foundations of experimental cost-benefit analysis in a fuzzy-decision space

The essay presents a theory of efficient prices for cost-benefit analysis in a fuzzy space. The approach proceeds by taking consumers' income, and producers' outputs and costs as given. The price preferences of consumers and producers are elicited and then embedded in a fuzzy space through fuzzy mappings to obtain a fuzzy compact price space where fuzzy price decisions are constructed. Solutions to the fuzzy price decision problems are abstracted through fuzzy mathematical programming to obtain fuzzy equilibrium prices. From the fuzzy price space measures of price disagreement, fuzzy consumer surplus and fuzzy producer surplus are advanced. Theorems of existence and uniqueness are stated. The total result is a theory of fuzzy prices for cost-benefit analysis for decision problem, in general including cases where market imputations of prices may not be available to us as well as those cases where market failure may yield price distortions. The theory is not only compactible with either contigent variation method (direct information elicitation) and revealed preference method (market-based evaluation) but provides a direction for cases where problems may exist in both. A computational example is provided to illustrate the working mechanism of the theory.

On Highway Fuel and Time Expenditures

User cost is one of the major considerations when designing a new highway. The vertical alignment of the highway (i.e., the determination of the pavement level along the highway's trajectory), is one of the design oriented factors which affects this cost. In this paper we investigate the influence of the slopes along the highway, which are determined as part of the vertical alignment, on the main parts of the user cost, namely, fuel cost and travel time value. We show that if, and only if, we evaluate each time unit at not less than a value we derive for it by a revealed preference method (from the driver's speed choice), then the sum of the fuel and time costs is a convex function of the slope. We also show that this sum is a convex function of the (traffic) flow. However, if we take the fuel cost alone, we do not get a convex function for either of these cases. For instance, the fuel cost as a function of the slope fails to be convex due to a drop in its derivative at the “critical slope” where the vehicle starts losing speed. Also we note that the same sum is not necessarily a convex function of both variables (slope and flow) together. Finally, we use the convexity of the fuel and time costs to show that the vertical alignment problem is convex too.