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Cardinal Revealed Preference, Price-Dependent Utility, and Consistent Binary Choice

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  • Victor H. Aguiar
  • Roberto Serrano
Abstract
We present a new notion of cardinal revealed preference that exploits the expenditure information in classical consumer theory environments with finite data. We propose a new behavioral axiom, Acyclic Enticement (AE), that requires the acyclicity of the cardinal revealed-preference relation. AE is logically independent from the Weak Axiom of Revealed Preference (WARP). We show that the Generalized Axiom of Revealed Preference (GARP), which characterizes the standard rational consumer, is logically equivalent to AE and WARP. We propose a new notion of rationalization by means of a price-dependent utility function that characterizes AE, which in particular is suitable for welfare analysis. We also propose a consistency condition for preference functions that is equivalent to WARP. We use our axiomatic decomposition to show, in experimental and scanner consumer-panel data sets, that AE explains the majority of the predictive success of GARP. Moreover, AE taken alone is superior in predictive success to both WARP and GARP.

Suggested Citation

  • Victor H. Aguiar & Roberto Serrano, 2018. "Cardinal Revealed Preference, Price-Dependent Utility, and Consistent Binary Choice," Working Papers 2018-3, Brown University, Department of Economics.
    • Handle: RePEc:bro:econwp:2018-3
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    References listed on IDEAS

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    Cited by:

    1. Georgios Gerasimou, 2019. "Simple Preference Intensity Comparisons," Discussion Paper Series, School of Economics and Finance 201905, School of Economics and Finance, University of St Andrews, revised 27 Apr 2020.
    2. Aguiar, Victor H. & Serrano, Roberto, 2021. "Cardinal revealed preference: Disentangling transitivity and consistent binary choice," Journal of Mathematical Economics, Elsevier, vol. 94(C).

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