The dynamics of preference formation

Individual's preferences are explained on the basis of two types of influences, his own past consumption and the consumption of others which is directly observable by him. These effects are estimated using the “individual welfare function” approach of Van Praag, and a model of preferences formation.     

The dynamics of preference formation

A model is developed and estimated which explains the formation of individual preferences on consumption under the influence of contacts with others (preference interdependence) and own consumption over time habit formation). The model employs a cardinal utility function which can be measured independently of behavioral assumptions. Since preference interdependence has been analyzed earlier, the paper concentrates on habit formation, the preference interdependence component being imputed from an earlier study. Due to data restrictions and measurement error, special econometric provisions must be made. Preference interdependence appears to explain two thirds of individual preferences and habit formation one third.     

The subjective expected utility hypothesis and revealed preference

Summary A choice behavior of a decision maker is said to satisfy the subjective expected utility hypothesis if there exist a utility and a subjective probability such that a decision maker chooses acts with the highest expected utility. We present a revealed preference characterization of choice behavior that is consistent with the subjective expected utility hypothesis. Our result applies to any state space and compact sets of prizes and observations (either finite or infinite).     

Fuzzy revealed preference theory

Rationality has traditionally been defined as choice behaviour which can be explained in terms of some implicit binary preference. The point of departure of this paper lies in permitting the binary preference relation to be “fuzzy.” Concepts from fuzzy set theory are used to formalise different notions of rationality, including degrees of rationality. The relation between these and traditional concepts is formally explored. In welfare economics, quasi-orderings have often been used to capture the inherent imprecisions of human value judgements. It is argued here that, in many situations, a more appropriate tool for this may be fuzzy orderings.     

A revealed preference test of rationing

This paper derives a revealed preference test for utility maximization under rationing and can detect, for which goods rationing is binding without specifying a functional form or imposing rationing constraints prior to estimation. For UK data from 1920–55, we find evidence of utility maximization under rationing with rationing binding for food and other services. Estimated virtual prices exceed observed food prices by 16.5% in 1947 and observed prices of other services by 10.9% in 1952.     

Self-control,revealed preference and consumption choice

We provide a time-consistent model that addresses the preference reversals that motivate the time-inconsistency literature. The model subsumes the behavior generated by the time-inconsistency approach in finite settings but, unlike the time-inconsistent models, allows for self-control. This paper provides a brief summary of theoretical results shown elsewhere [Gul and Pesendorfer, Econometrica 69 (2001) 1403; Econometrica, (2002), in press; Rev. Econ. Stud. (2002), in press] and contrasts the predictions and welfare implications of our model and the time-inconsistent β−δ model.     

Characterization of generalized weak orders and revealed preference

Summary This short paper provides an alternative framework to axiomatize various binary preference relations such as semiorder, weak semiorder etc. A set of simple axioms is presented in terms of revealed-preferred and revealed-inferior alternatives which makes the connection between various binary preference relations transparent; and every single axiom is necessary and sufficient for the existence of a binary preference relation of a specified type.We thank Bhasker Dutta, Peter Fishburn, Prasanta Pattanaik, Robert Russell and Thomas Schwartz for helpful suggestions     

Stable schedule matching under revealed preference

Baiou and Balinski (Math. Oper. Res., 27 (2002) 485) studied schedule matching where one determines the partnerships that form and how much time they spend together, under the assumption that each agent has a ranking on all potential partners. Here we study schedule matching under more general preferences that extend the substitutable preferences in Roth (Econometrica 52 (1984) 47) by an extension of the revealed preference approach in Alkan (Econom. Theory 19 (2002) 737). We give a generalization of the Gale-Shapley algorithm and show that some familiar properties of ordinary stable matchings continue to hold. Our main result is that, when preferences satisfy an additional property called size monotonicity, stable matchings are a lattice under the joint preferences of all agents on each side and have other interesting structural properties.     

The housing problem and revealed preference theory: duality and an application

This paper exhibits a duality between the theory of revealed preference of Afriat and the housing allocation problem of Shapley and Scarf. In particular, it is shown that Afriat’s theorem can be interpreted as a second welfare theorem in the housing problem. Using this duality, the revealed preference problem is connected to an optimal assignment problem, and a geometrical characterization of the rationalizability of experiment data is given. This allows in turn to give new indices of rationalizability of the data and to define weaker notions of rationalizability, in the spirit of Afriat’s efficiency index.     

Rational inattention and revealed preference: The data-theoretic approach to economic modeling

Beliefs have as pervasive a role as utility functions in economic models of choice, and are no more visible to the naked eye. This suggests the value of a data-theoretic approach to imperfect information along the lines of Samuelson's “revealed preference” approach to utility maximization. I introduce a recently developed approach of this nature (Caplin and Martin, 2013a, Caplin and Dean, 2013a, Caplin and Dean, 2013b). I highlight the broader potential of the data-theoretic approach to answer questions of an inter-disciplinary nature and to discipline an oncoming flood of behaviorally-relevant data.     

Continuous choice functions and the strong axiom of revealed preference

Summary In this note, it is shown that a result due to Uzawa showing that the weak axiom of revealed preference together with a regularity condition implies the strong axiom of revealed preference can be derived from the regularity conditionalone, if the choice function is continuous in prices and in income. The observation that the weak axiom of revealed preference is not needed suggests that this regularity condition is remarkably strong. The main result of the paper is quite general in the sense that the only additional assumption on the choice function is that the whole budget be spent.I thank Charles Blackorby for his comments on an earlier version.     

The demand functions that satisfy the weak axiom of revealed preference and generalized monotonicity

We prove that the individual demand function satisfying the Weak Axiom of Revealed Preference and the excess demand function satisfying the Wald’s Axiom are pseudomonotone_*⁺, a new class of generalized monotonicity. With this new concept, we refine the characterization of Zhou for the individual demand function. In particular, a full characterization for the excess demand functions satisfying the Wald’s Axiom is derived.     

What kind of preference maximization does the weak axiom of revealed preference characterize?

A (multivalued) choice is justified if no two chosen alternatives are preferred to each other, and if all chosen alternatives are preferred to all rejected alternatives. This concept permits a connection between the behavioral property expressed by WARP and a weak form of preference maximization. I am grateful to Michele Lombardi, Michael Mandler, Paola Manzini and an anonymous referee for useful discussions and comments.     

Economies of scale and the optimality of rotational dynamics in forestry

Forest harvesting is traditionally analyzed in terms of the Faustmann rotation model. This paper considers the identification of optimal forest harvest regimes using jump controls. This approach enables the structural assumptions of clear-cut technology and identical cycles in perpetuity which are imposed in a Faustmann model to be relaxed. Jump control models permit investigation of the biological and economic conditions which favour continuous growth management regimes as opposed to clear-cut harvest regimes. A numerical solution approach to the jump control model is presented. The link between the harvest cost function and the optimal biomass path is analyzed. Economies of scale are shown to generate rotational harvest as optimal policies.      

A general revealed preference theorem for stochastic demand behavior

Summary. We present a general revealed preference theorem concerning stochastic choice behavior by consumers. We show that, when the consumer spends her entire wealth, the Weak Axiom of Stochastic Revealed Preference due to Bandyopadhyay, Dasgupta, and Pattanaik (1999) is equivalent to a restriction on stochastic demand behavior that we call stochastic substitutability. We also show that the relationship between the Weak Axiom of Revealed Preference and Samuelson's inequality in the deterministic theory, and the main result of Bandyopadhyay, Dasgupta, and Pattanaik (1999) are both special cases of our result.Received: 10 September 2001, Revised: 4 April 2003, JEL Classification Numbers: D11. Correspondence to: Prasanta K. PattanaikOur greatest debt is to the referee of this paper, who made numerous helpful suggestions. We thank Robin Cubitt, Kunal Sengupta and seminar audiences at Jawaharlal Nehru University, Indian Statistical Institute, University of East Anglia, Universidad Carlos III, University of Essex and University of Montreal for their helpful comments. Prasanta K. Pattanaik acknowledges his intellectual debt to Salvador Barbera, Tapas Majumdar and Amartya Sen.     

A nonparametric revealed preference test of optimal intra-firm resource allocation

The collective rationality hypothesis initiated by Chiappori (1988a Chiappori, PA. 1988a. Rational household labor supply. Econometrica, 56: 63–89. [Crossref], [Web of Science ®] , [Google Scholar]) and applied by Seaton (1997 Seaton, JS. 1997. Neoclassical and collective rationality in household labour supply. Applied Economics Letters, 4: 529–33. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar], 2001) for a two-person household is used to distinguish the organizational behaviour of firms. Firms produce satisfaction to groups as traditional managerial and early behavioural theories of the firm of Williamson, Baumol and Marris suggest, as well as more modern principle agent models. Under certain conditions, intra-firm bargaining leads to a Pareto optimal outcome. What makes this work an important contribution is that it identifies a set of nonvacuous testable restrictions to empirically detect if firm-level data satisfy Pareto optimal behaviour for the main decision makers in the organization.     

‘Regular’ choice and the weak axiom of stochastic revealed preference

We explore the relation between two ‘rationality conditions’ for stochastic choice behavior: regularity and the weak axiom of stochastic revealed preference (WASRP). We show that WASRP implies regularity, but the converse is not true. We identify a restriction on the domain of the stochastic choice function, which suffices for regularity to imply WASRP. When the universal set of alternatives is finite, this restriction is also necessary for regularity to imply WASRP. Furthermore, we identify necessary and sufficient domain restrictions for regularity to imply WASRP, when the universal set of alternatives is finite and stochastic choice functions are all degenerate. Results in the traditional, deterministic, framework regarding the relation between Chernoff’s condition and the weak axiom of revealed preference follow as special cases. Thus, general conditions are established, under which regularity can substitute for WASRP as the axiomatic foundation for a theory of choice behavior.