Are Consumers (Approximately) Rational? Shifting the Burden of Proof

Laurens Cherchye, Thomas Demuynck, Bram De Rock and Joshua Lanier

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: Abstract We present a statistical test for the hypothesis of (approximate) utility maximization on the basis of nonparametric revealed preference conditions. We take as null hypothesis that the consumer behaves randomly, and we reject this hypothesis only if the data provides sufficient evidence to support the alternative hypothesis of approximate utility maximization. Our statistical test uses a permutation method to operationalize the principle of random consumption behavior. We show that our test (i) is valid for any sample size under the null and (ii) has an asymptotic power of one. We also provide simulated power results and two empirical applications.

Date: 2025-11
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Published in: Review of economics and statistics (2025) v.107 n° 6,p.1652-1666

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