Work

Are Consumers (Approximately) Rational? Shifting the Burden of Proof

Year: 2023

Type: article

Abstract: We present a statistical test for the hypothesis of (approximate) utility maximization on the basis of nonparametric revealed preference conditions. We take as null hypothesis that the consumer behaves randomly, and we reject this hypothesis only if the data provides sufficient evidence to support the alternative hypothesis of approximate utility maximization. Our statistical test uses a permutation method to operationalize the principle of random consumption behavior. We show that our test (i) is valid for any sample size under the null and (ii) has an asymptotic power of one. We also provide simulated power results and two empirical applications.

Source: The Review of Economics and Statistics

DOI: 10.1162/rest_a_01360

Authors: Laurens Cherchye, Thomas Demuynck, Bram De Rock, Joshua Lanier

Institutions: KU Leuven, Université Libre de Bruxelles, Southwestern University of Finance and Economics

Language: English

Topic: Decision-Making and Behavioral Economics

Subfield: General Decision Sciences

Field: Decision Sciences

Domain: Social Sciences

Open Access status: green