Homothetic Efficiency: Theory and Applications

Jan Heufer and Per Hjertstrand

Journal of Business & Economic Statistics, 2019, vol. 37, issue 2, 235-247

Abstract: We provide a nonparametric revealed preference approach to demand analysis based on homothetic efficiency. Homotheticity is widely assumed (often implicitly) because it is a convenient and often useful restriction. However, this assumption is rarely tested, and data rarely satisfy testable conditions. To overcome this, we provide a way to estimate homothetic efficiency of consumption choices. The method provides considerably higher discriminatory power against random behavior than the commonly used Afriat efficiency. We use experimental and household survey data to illustrate how our approach is useful for different empirical applications and can provide greater predictive success.

Date: 2019
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:37:y:2019:i:2:p:235-247

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DOI: 10.1080/07350015.2017.1319372

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