Homothetic Efficiency and Test Power: A Non-Parametric Approach

Jan Heufer and Per Hjertstrand
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Jan Heufer: Erasmus University Rotterdam, the Netherlands

No 15-064/I, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We provide a nonparametric revealed preference approach to demand analysis based on homothetic efficiency. Homotheticity is a useful restriction but data rarely satisfies testable conditions. To overcome this we provide a way to estimate homothetic efficiency of consumption choices. It generalises Heufer's (2013) two-dimensional concept to arbitrary dimensions and is motivated by a form of rationalisation similar to Halevy et al. (2012). The method allows to recover larger preferred and worse sets and provides considerably more preditive success and discriminatory power against random behaviour. An application to experimental and household expenditure data illustrates the potential of our approach.

Keywords: Demand Theory; Efficiency; Experimental Economics; Homotheticity; Non-parametric Analysis; Revealed Preference; Utility Maximisation (search for similar items in EconPapers)
JEL-codes: C14 D11 D12 (search for similar items in EconPapers)
Date: 2015-05-29
New Economics Papers: this item is included in nep-eff
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20150064

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