Measuring Rationality with the Minimum Cost of Revealed Preference Violations

Mark Dean and Daniel Martin

The Review of Economics and Statistics, 2016, vol. 98, issue 3, 524-534

Abstract: We introduce a new measure of how close a set of choices is to satisfying the observable implications of rationality and apply it to a large, balanced panel of household level consumption data. This new measure, the minimum cost index, is the minimum cost of breaking all revealed preference cycles found in choices from budget sets. Unlike existing measures of rationality, it responds to both the number and severity of revealed preference violations.

JEL-codes: C63 D03 D10 D12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (73)

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