Revealed Preference with Limited Consideration
29 Pages Posted: 14 Oct 2014 Last revised: 18 Dec 2014
Date Written: December 18, 2014
Abstract
We derive revealed preference tests for models where individuals use consideration sets to simplify their consumption problem. Our basic test provides necessary and sufficient conditions for consistency of observed choices with the existence of consideration set restrictions. The same conditions can also be derived from a model in which the consideration set formation is endogenous and based on subjective, unconstrained beliefs about the prices. By imposing restrictions on these subjective beliefs, we obtain additional refined revealed preference tests. We illustrate and compare the performance of our tests by means of a dataset on household consumption choices.
Keywords: Revealed preference, bounded rationality, consideration set
JEL Classification: D11, D12, D81
Suggested Citation: Suggested Citation