The theory of rational random behavior and its application to demand analysis

The author's theory of rational random behavior is developed, which distinguishes between the planning and the implementation stage of the decision-maker. Under the assumption of a quadratic loss function and decision variables with an unrestricted range, that theory implies normally distributed disturbances of behavioral equations with a covariance matrix that is known up to a scalar multiple. Those results have to be extended asymptotically by Barbosa for restricted decision variables and a more general loss function. The approach is applied to both the Rotterdam and the linear expenditure demand models: using U.S. postwar data for the former, the author finds that a likelihood ratio test accepts the theory at the 10 percent significance level.