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A comprehensive revealed preference approach to approximate utility maximisation

Pawel Dziewulski ()

Working Paper Series from Department of Economics, University of Sussex Business School

Abstract: We develop a comprehensive revealed preference method for studying approximate utility maximisation, where an alternative is selected from a menu only if its utility is not significantly lower than that of any other available option. We show that this model characterises choices that violate transitivity of indifferences, but preserve transitivity of the revealed strict preferences. More importantly, although the individual may fail to maximise their utility exactly, it is possible to recover their true preferences from the observable data, make out-of-sample predictions and welfare comparisons. Our results require minimal assumptions on the empirical framework and are applicable, amongst others, to the study of choices over consumption bundles, state-contingent consumption, and lotteries.

Keywords: approximate utility maximisation; revealed preference analysis; nontransitive indifferences; recoverability of preferences; interval order (search for similar items in EconPapers)
JEL-codes: D11 D81 D91 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-upt
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