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The Revealed Preference Approach to Collective Consumption Behavior: Testing, Recovery and Welfare Analysis

Laurens Cherchye, Bram De Rock and Frederic Vermeulen

No 3062, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We extend the nonparametric ‘revealed preference’ methodology for analyzing collective consumption behavior (with consumption externalities and public consumption), to render it useful for empirical applications that deal with welfare-related questions. First, we provide a nonparametric necessary and sufficient condition for collectively rational group behavior that incorporates the possibility of assignable quantity information. This characterizes collective rationality in terms of feasible personalized prices, personalized quantities and income shares (representing the underlying sharing rule). Subsequently, we present nonparametric testing tools for data consistency with special cases of the collective model, which impose specific structure on the preferences of the group members (in terms of consumption externalities and public consumption); and we show that these testing tools in turn allow for nonparametrically recovering (bounds on) feasible personalized prices, personalized quantities and income shares that underlie observed (collectively rational) group behavior. In addition, we present formally similar testing and recovery tools for the general collective consumption model, which imposes minimal a priori structure. Interestingly, the proposed testing and recovery methodology can be implemented through integer programming (IP and MILP), which is attractive for practical applications. Finally, while we argue that assignable quantity information generally entails more powerful recovery results, we also demonstrate that precise nonparametric recovery (i.e. tight bounds) can be obtained even if no assignable quantity information is available.

Keywords: collective model; revealed preferences; consumption; testing; welfare analysis; recovery; integer programming (search for similar items in EconPapers)
JEL-codes: C14 D11 D12 D13 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2007-09
New Economics Papers: this item is included in nep-cdm
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Citations: View citations in EconPapers (15)

Published - published as 'The revealed preference approach to collective consumption behavior: testing and sharing rule recovery' in: Review of Economic Studies, 2011, 78 (1), 175 - 198

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Working Paper: The Revealed preference approach to collective consumption behavior: testing, recovery and Welfare analysis (2008) Downloads
Working Paper: The revealed preference approach to collective consumption behavior: testing, recovery and welfare analysis (2007) Downloads
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