Revealed Preference Theory Research Articles

A Rationalization of the Weak Axiom of Revealed Preference

We offer a rationalization of the weak axiom of revealed preference (WARP) and of the weak generalized axiom of revealed preference (WGARP) for both finite and infinite data sets of consumer choice. We call it maximin rationalization, in which each pairwise choice is associated with a local utility function. We develop its associated revealed-preference theory. We show that preference recoverability and welfare analysis a la Varian (1982) may not be informative enough when the weak axiom holds but when consumers are not utility maximizers. In addition, we show that counterfactual analysis may fail with WGARP/WARP. We clarify the reasons for these failures and provide new informative bounds for the consumer’s true preferences, as well as a new way to perform counterfactual analysis. Finally, by adding the Gorman form and quasilinearity restrictions to the “local” utility functions, we obtain new characterizations of the choices of the Shafer (1974) nontransitive consumer and those choices satisfying the law of demand.

Rationalizable Incentives: Interim Implementation of Sets in Rationalizable Strategies

We offer a rationalization of the weak axiom of revealed preference (WARP) and of the weak generalized axiom of revealed preference (WGARP) for both finite and infinite data sets of consumer choice. We call it maximin rationalization, in which each pairwise choice is associated with a local utility function. We develop its associated revealed-preference theory. We show that preference recoverability and welfare analysis a la Varian (1982) may not be informative enough when the weak axiom holds but when consumers are not utility maximizers. In addition, we show that counterfactual analysis may fail with WGARP/WARP. We clarify the reasons for these failures and provide new informative bounds for the consumer’s true preferences, as well as a new way to perform counterfactual analysis. Finally, by adding the Gorman form and quasilinearity restrictions to the “local” utility functions, we obtain new characterizations of the choices of the Shafer (1974) nontransitive consumer and those choices satisfying the law of demand.

Filtered Belief Revision and Generalized Choice Structures

In an earlier paper [Rational choice and AGM belief revision, Artificial Intelligence, 2009] a correspondence was established between the choice structures of revealed-preference theory (developed in economics) and the syntactic belief revision functions of the AGM theory (developed in philosophy and computer science). In this paper we extend the re-interpretation of (a generalized notion of) choice structure in terms of belief revision by adding: (1) the possibility that an item of information'' might be discarded as not credible (thus dropping the AGM success axiom) and (2) the possibility that an item of information, while not accepted as fully credible, may still be taken seriously'' (we call such items of information allowable''). We establish a correspondence between generalized choice structures (GCS) and AGM belief revision; furthermore, we provide a syntactic characterization of the proposed notion of belief revision, which we call filtered belief revision.

New Developments in Revealed Preference Theory: Decisions Under Risk, Uncertainty, and Intertemporal Choice

This article reviews recent developments in revealed preference theory. It discusses the testable implications of theories of choice that are germane to specific economic environments. The focus is on expected utility in risky environments, subjected expected utility and maxmin expected utility in the presence of uncertainty, and exponentially discounted utility for intertemporal choice. The testable implications of these theories for data on choice from classical linear budget sets are described and shown to follow a common thread. The theories all imply an inverse relation between prices and quantities, with different qualifications depending on the functional forms in the theory under consideration.

Orbitofrontal signals for two-component choice options comply with indifference curves of Revealed Preference Theory

Economic choice options contain multiple components and constitute vectorial bundles. The question arises how they are represented by single-dimensional, scalar neuronal signals that are suitable for economic decision-making. Revealed Preference Theory provides formalisms for establishing preference relations between such bundles, including convenient graphic indifference curves. During stochastic choice between bundles with the same two juice components, we identified neuronal signals for vectorial, multi-component bundles in the orbitofrontal cortex of monkeys. A scalar signal integrated the values from all bundle components in the structured manner of the Theory; it followed the behavioral indifference curves within their confidence limits, was indistinguishable between differently composed but equally revealed preferred bundles, predicted bundle choice and complied with an optimality axiom. Further, distinct signals in other neurons coded the option components separately but followed indifference curves as a population. These data demonstrate how scalar signals represent vectorial, multi-component choice options.

On the Equivalence of Weak- and Cyclic-Monotonicity

We provide an approach to studying the equivalence of weak- and cyclic-monotonicity conditions in convex and non-convex domains with a finite set of outcomes. Using this approach, we establish the new equivalence results for gross-substitutes preferences and single-peaked preferences on posets. We also provide novel applications of the equivalence result to problems in mechanism design, spatial allocation, revealed preference theory, and producer choice theory.

Credible Information, Allowable Information and Belief Revision - Extended Abstract

In an earlier paper [Rational choice and AGM belief revision, Artificial Intelligence, 2009] a correspondence was established between the choice structures of revealed-preference theory (developed in economics) and the syntactic belief revision functions of the AGM theory (developed in philosophy and computer science). In this paper we extend the re-interpretation of (a generalized notion of) choice structure in terms of belief revision by adding: (1) the possibility that an item of "information" might be discarded as not credible (thus dropping the AGM success axiom) and (2) the possibility that an item of information, while not accepted as fully credible, may still be "taken seriously" (we call such items of information "allowable"). We establish a correspondence between generalized choice structures (GCS) and AGM belief revision; furthermore, we provide a syntactic analysis of the proposed notion of belief revision, which we call filtered belief revision.

Descriptive complexity and revealed preference theory

This paper formalizes revealed preference theory using the notion of Ramsey eliminability in logic, and shows how the language required to state a revealed preference axiom for some choice theory is closely connected with the computational tractability of testing that theory. The connection is made through results in descriptive complexity theory, a relatively new field in finite model theory. It is shown that checking whether observed choices of players in normal form games are Nash rationalizable is an NP-complete problem. This also means that there does not exist an analogue (in a precise sense) of the Strong Axiom of Revealed Preference for Nash equilibrium.

Choice theoretic foundation for libertarian paternalism: Reconciling the behavioral and libertarian approaches to welfare

In this paper, we generalize the standard revealed preference theory in line with the idea of libertarian paternalism; roughly, x is said to be welfare superior to y (denoted x≿ℓPy) if x is chosen when y is available, and x is more normative than y according to a possibly endogenous normative criterion (i.e. a criterion that depends on a positive model). We find testable conditions on choice behavior that are equivalent to ≿ℓP being an order. The resulting framework is applicable to many positive models of bounded rationality, with intuitive welfare implications, while maintaining a natural libertarian principle. In addition, our framework can reconcile the often-conflicting libertarian and behavioral approaches to welfare.

Samuelson's Approach to Revealed Preference Theory: Some Recent Advances

Since Paul Samuelson introduced the theory of revealed preference, it has become one of the most important concepts in economics. This chapter surveys some recent contributions in the revealed preference literature. We depart from Afriat's theorem, which provides the conditions for a data set to be consistent with the utility maximization hypothesis. We provide and motivate a new condition, which we call the Varian inequalities. The advantage of the Varian inequalities is that they can be formulated as a set of mixed integer linear inequalities, which are linear in the quantity and price data. We show how the Varian inequalities can be used to derive revealed preference tests for weak separability, and show how it can be used to formulate tests of the collective household model. Finally, we discuss measurement errors in the observed data and measures of goodness-of-fit, power and predictive success.

Parametric Recoverability of Preferences

Revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices. We propose measures of the incompati...

A simple characterization of responsive choice

We provide several characterizations of q-responsive choice functions, based on classical axioms of matching theory and revealed preference theory.

Existence of Monopoly Power in Dietary Market and the Question of Market Failure: A Measurement Using Fuzzy Matrix Theory

In economics, market failure is a situation in which the allocation of goods and services is not efficient. Monopoly power and asymmetric information are amongst the major causes of market failure. We plan to identify if there is a market failure in the dietary market. The present study plans to understand how the dietary market works in the city of Pune. After doing some field survey, we have identified that, even though demand for good food is present, but there is a supply-side problem. The market failure is due to asymmetric information about the supply side. Here we have confined ourselves to revealed preference theory. By revealed preference theory we mean ex-ante preferences of the respondents (students). Here we consider fuzzy preference, not crisp preference. We describe a simple fuzzy matrix model when we have a raw data in hand to identify the factors affecting market failure in the dietary market in Pune; also, measurement of the existence of monopoly power from the behavioural point of view.

Conceptual Approach on Private Label Brands

The Indian retail era is witnessing the migration of trade activities from the national brand to phantom brand in the past decade. In spite of economical and political fluctuations, the Indian retail has emerged with promising sign of growth in Private label branding. The current study tries to correlate the economic theory with private labeling as the customer preference of private label is the secret of level success in Indian retail. The initial chapter provides fundamental information about private labeling. Chapter two enlists the literature review. Chapter three endorses the application of revealed preference theory of consumer behavior for private labeling. Chapter four envisages the mechanism of private labeling and the last chapter concludes with the road map of private labeling in Indian retail.

Risk Preferences and the Macroeconomic Announcement Premium

This paper develops a revealed preference theory for the equity premium around macroeconomic announcements. Stock returns realized around pre‐scheduled macroeconomic announcements, such as the employment report and the FOMC statements, account for 55% of the market equity premium. We provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium. Our theory establishes that the announcement premium identifies a significant deviation from time‐separable expected utility and provides asset‐market‐based evidence for a large class of non‐expected utility models. We also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre‐announcement drift.

Measuring the willingness-to-pay for others' consumption: An application to joint decisions of children

We propose a method to quantify other‐regarding preferences in group decisions. Our method is based on revealed preference theory. It measures willingness‐to‐pay for others' consumption and willingness‐to‐pay for equality in consumption by evaluating consumption externalities in monetary terms. We introduce an altruism parameter and an inequality aversion parameter. Each parameter defines a continuum of models characterized by varying degrees of externalities. We study the empirical performance of our method through a simulation analysis, in which we also investigate the impact of measurement error and increased sample size. Finally, we use our method to analyze decisions made by dyads of children in an experimental setting. We find that children's decisions are particularly characterized by varying levels of altruism. We relate this heterogeneity across children to age, gender, and the degree of friendship in dyads. Consumption externalities altruism inequality aversion revealed preferences children's consumption D11 D12 C14

On the consistency of choice

Consistency of choice is a fundamental and recurring theme in decision theory, social choice theory, behavioral economics, and psychological sciences. The purpose of this paper is to study consistency of choice independent of the particular decision model at hand. Consistency is viewed as an inherently logical concept that is fundamentally void of connotation and is thus disentangled from traditional rationality or consistency conditions imposed on decision models. The proposed formalization of consistency takes two forms: internal consistency, which refers to the property that a choice model does not generate contradictory statements; and semantic consistency, which refers to the idea that a theory's predictions are valid with respect to some observed data. In addressing semantic consistency, the relationship between theory and data is analyzed in terms of so-called duality mappings, which allow a passage between the two universes in a way that consistency is preserved. The formalization of consistency concepts relies on adapting revealed preference theory to the context-dependent setting. The paper concludes by discussing the implications of the proposed framework and how it relates to classical revealed preference theory and other formalizations of the relationship between the theory and reality of choice.

What Types are There?

Preferences differ in the population, and this heterogeneity may not be adequately described by observed characteristics and additive error terms. As a first contribution, this study shows that preference heterogeneity can be represented graphically by means of violations of the Weak Axiom of Revealed Preference (WARP), and that computing the minimum number of partitions necessary to break all WARP violations in the sample is equivalent to computing the chromatic number of this graph. Second, the study builds the bridge between revealed preference theory and cluster analysis to assign individuals to these partitions (i.e. preference types). The practical methods are applied to Dutch labour supply data, to recover reservation wages of individuals who belong to particular preference types.

Revealed Preference, Afriat's Theorem, and Falsifiability: A Review Essay on Revealed Preference Theory by Christopher P. Chambers and Federico Echenique

This paper uses the 2016 book by Chambers and Echenique as the focal point for a general discussion of the revealed preference literature: starting with Samuelson (1938) but with a particular emphasis on its relationship to general equilibrium theory and recent empirical applications. The main purpose is exposition, not criticism, but Chambers and Echenique's commitment to Karl Popper's logical falsificationism is criticized in the final section of the paper.

Revealed Preference, Afriat’s Theorem, and Falsifiability: A Review Essay on Revealed Preference Theory by Chr

Revealed Preference, Afriat’s Theorem, and Falsifiability: A Review Essay on Revealed Preference Theory by Chr