What Types are There?
Luxembourg Institute of Socio-Economic Research (LISER) Working Paper Series 2017-01
32 Pages Posted: 31 Jan 2017
Date Written: January 31, 2017
Abstract
Preferences differ in the population, and this heterogeneity may not be adequately described by observed characteristics and additive error terms. As a first contribution, this study shows that preference heterogeneity can be represented graphically by means of violations of the Weak Axiom of Revealed Preference (WARP), and that computing the minimum number of partitions necessary to break all WARP violations in the sample is equivalent to computing the chromatic number of this graph. Second, the study builds the bridge between revealed preference theory and cluster analysis to assign individuals to these partitions (i.e. preference types). The practical methods are applied to Dutch labour supply data, to recover reservation wages of individuals who belong to particular preference types.
Keywords: preference heterogeneity, chromatic number, revealed preference, labour supply, constrained clustering
JEL Classification: C14, C38, C44, D12, D13
Suggested Citation: Suggested Citation