Sharp for SARP: Nonparametric Bounds on the Behavioural and Welfare Effects of Price Changes
CentER Discussion Paper Series No. 2012-065
12 Pages Posted: 28 Aug 2012
Date Written: August 27, 2012
Sharp nonparametric bounds are derived for Hicksian compensating and equivalent variations. These 'i-bounds' generalize earlier results of Blundell, Browning and Crawford (2008). We show that their e-bounds are sharp under the Weak Axiom of Revealed Preference (WARP). They do not require transitivity. The new i-bounds are sharp under the Strong Axiom of Revealed Preference (SARP). By requiring transitivity they can be used to bound welfare measures. The new bounds on welfare measures are shown to be operationalized through algorithms that are easy to implement.
Keywords: consumer demand, revealed preference, set identification, bounds
JEL Classification: D11, D12, C14
Suggested Citation: Suggested Citation