Journal Article

How demanding is the revealed preference approach to demand?

Date: 01 October 2011
Authors:
Publisher: American Economic Association
ISSN: 0002-8282
Published in: American Economic Review , Vol. 101, No. 6 pp. 2782-2795
JEL classification: D11; D12

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.

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

How demanding is the revealed preference approach to demand?