Testing rationality without restricting heterogeneity

Kohei Kawaguchi ()

Journal of Econometrics, 2017, vol. 197, issue 1, 153-171

Abstract: I derive a necessary condition for stochastic rationalizability using a set of utility functions with a unique maximizer, which I name the strong axiom of revealed stochastic preference (SARSP). I also provide a constructive characterization of rationalizability in a regular finite linear budget setting and discuss the (in)sufficiency of SARSP. I propose a test of rationality based on the SARSP. Monte Carlo simulation and an application to data from the British Family Expenditure Survey demonstrate that the SARSP test has an empirical size below the nominal size, relatively strong power, and substantially reduces the computation time compared to the existing method.

Keywords: Stochastic rationalizability; Axiom of revealed stochastic preference; Nonparametric test; Bootstrap (search for similar items in EconPapers)
JEL-codes: C14 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:197:y:2017:i:1:p:153-171

DOI: 10.1016/j.jeconom.2016.11.003

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