Revealed preference theory for finite choice sets

S. Cosaert*, T. Demuynck

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

The theory of revealed preferences offers an elegant way to test the neoclassical model of utility maximization subject to a linear budget constraint. In many settings, however, the set of available consumption bundles does not take the form of a linear budget set. In this paper, we adjust the theory of revealed preferences to handle situations where the set of feasible bundles is finite. Such situations occur frequently in many real life and experimental settings. We derive the revealed preference conditions for consistency with utility maximization in this finite choice set setting. Interestingly, we find that it is necessary to make a distinction between the cases where the underlying utility function is weakly monotone, strongly monotone and/or concave. Next, we provide conditions on the structure of the finite choice sets for which the usual revealed preference condition (i.e. GARP) is still valid. We illustrate the relevance of our results by means of an illustration based on two experimental data sets that contain choice behaviour from children and young adults.

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Original languageEnglish
Pages (from-to)169-200
Number of pages32
JournalEconomic Theory
Volume59
Issue number1
DOIs
Publication statusPublished - May 2015

Keywords

  • Revealed preferences
  • Finite choice sets
  • Experimental economics
  • NON-PARAMETRIC TESTS
  • BEHAVIOR
  • CONSUMERS
  • GARP

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