Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics

64 Pages Posted: 24 Jan 2008 Last revised: 16 Jul 2010

See all articles by B. Douglas Bernheim

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Antonio Rangel

California Institute of Technology

Date Written: January 2008

Abstract

We propose a broad generalization of standard choice-theoretic welfare economics that encompasses a wide variety of non-standard behavioral models. Our approach exploits the coherent aspects of choice which those positive models typically attempt to capture. It replaces the standard revealed preference relation with an unambiguous choice relation: roughly, x is (strictly) unambiguously chosen over y (written xP*y) if y is never chosen when x is available. Under weak assumptions, P* is acyclic and therefore suitable for welfare analysis; it is also the most discerning welfare criterion that never overrules choice. The resulting framework generates natural counterparts for the standard tools of applied welfare economics, and is easily applied in the context of specific behavioral theories, with novel implications. Though not universally discerning, it lends itself to principled refinements.

Suggested Citation

Bernheim, B. Douglas and Rangel, Antonio, Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics (January 2008). NBER Working Paper No. w13737. Available at SSRN: https://ssrn.com/abstract=1086986

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
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650-725-8732 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Antonio Rangel

California Institute of Technology ( email )

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