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Afriat in the Lab

Jan Heufer and Paul van Bruggen
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Jan Heufer: Erasmus University Rotterdam, The Netherlands
Paul van Bruggen: Erasmus University Rotterdam, The Netherlands

No 16-095/I, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Varian (1988) showed that the utility maximization hypothesis cannot be falsified when only a subset of goods is observed. We show that this result does not hold under the assumptions that unobserved prices and expenditures remain constant. These assumptions are naturally satisfied in laboratory settings where the world outside the lab remains unchanged during the experiment. Hence for so-called induced budget experiments the Generalized Axiom of Revealed Preference is a necessary and sufficient condition for utility maximization in general, not just in the lab. Lab experiments are therefore a valid tool to put the utility maximization hypothesis to the test.

Keywords: Afriat's Theorem; Experimental Economics; GARP; Revealed Preference; Utility Maximization (search for similar items in EconPapers)
JEL-codes: C14 C91 D11 D12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-mic and nep-upt
Date: 2016-11-10
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