Is Utility Transferable? A Revealed Preference Analysis
CentER Discussion Paper Series No. 2011-018
24 Pages Posted: 28 Feb 2011 Last revised: 20 Apr 2011
Date Written: February 28, 2011
We provide a revealed preference analysis of the transferable utility hypothesis, which is widely used in economic models. First, we establish revealed preference conditions that must be satisfied for observed group behavior to be consistent with Pareto efficiency under transferable utility. Next, we show that these conditions are easily testable by means of integer programming methods. The tests are entirely nonparametric, which makes them robust with respect to specification errors. Finally, we demonstrate the practical usefulness of our conditions by means of an application to Spanish consumption data. To the best of our knowledge, this is the first empirical test of the transferable utility hypothesis.
Keywords: Transferable Utility Hypothesis, Generalized Quasi-Linearity, Nonparametric Tests, Revealed Preferences
JEL Classification: C14, DO1, D11, D12, D13
Suggested Citation: Suggested Citation