 The Empirical Content of Binary Choice ModelsAbstract: An important goal of empirical demand analysis is choice and welfare prediction on counterfactual budget sets arising from potential policy-interventions. Such predictions are more credible when made without arbitrary functional-form/distributional assumptions, and instead based solely on economic rationality, i.e. that choice is consistent with utility maximization by a heterogeneous population. This paper investigates nonparametric economic rationality in the empirically important context of binary choice. We show that under general unobserved heterogeneity, economic rationality is equivalent to a pair of Slutsky-like shape-restrictions on choice-probability functions. The forms of these restrictions differ from Slutsky-inequalities for continuous goods. Unlike McFadden-Richter's stochastic revealed preference, our shape-restrictions (a) are global, i.e. their forms do not depend on which and how many budget-sets are observed, (b) are closed-form, hence easy to impose on parametric/semi/non-parametric models in practical applications, and (c) provide computationally simple, theory-consistent bounds on demand and welfare predictions on counterfactual budget-sets. Date: 2019-02, Revised 2020-10 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1902.11012 Access Statistics for this paper More papers in Papers from arXiv.org |
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