Generating Random Optimising Choices

Jan Heufer

No 354, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper provides an efficient way to generate a set of random choices on a set of budgets which satisfy the Generalised Axiom of Revealed Preferences (GARP), that is, they are consistent with utility maximisation. The choices are drawn from an approximate uniform distribution on the admissible region on each budget which ensures consistency with GARP, based on a Markovian Monte Carlo algorithm due to Smith (1984). This procedure can be used to extend Bronars' (1987) method as it can be used to approximate the power of tests for conditions for which GARP is a necessary but not sufficient condition (e.g., homotheticity, separability, risk aversion, etc.). For example, it allows to approximate the probability that a set of random choices which happens to satisfy GARP is also consistent with homotheticity. The approach can also be applied to production analysis and nonparametric tests of cost minimisation.

Keywords: Cost minimisation; GARP; hypothesis testing; Monte Carlo methods; nonparametric tests; test power; random optimal choices; revealed preference; utility maximisation (search for similar items in EconPapers)
JEL-codes: C14 C63 D11 D12 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:354

DOI: 10.4419/86788408

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