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How demanding is the revealed preference approach to demand?

Journal article | American Economic Review

A well-known problem with revealed preference methods is that when data are found to satisfy their restrictions it is hard to know whether this should be viewed as a triumph for economic theory, or a warning that these conditions are so undemanding that almost anything goes. This paper allows researchers to make this distinction. Our approach uses an axiomatic characterization of a measure of predictive success due to Selten (1991). We illustrate the idea using a panel dataset. The results show that this approach can lead us to radically reassess our view of the empirical performance of economic theory.

Find the working paper here.

Figure. A two-good, two-choice example with predictive ability

How demanding is the revealed preference approach to demand?