Homothetic Efficiency and Test Power: A Non-Parametric Approach

Tinbergen Institute Discussion Paper 15-064/I

36 Pages Posted: 30 May 2015

See all articles by Jan Heufer

Jan Heufer

Erasmus University Rotterdam (EUR) - Department of Applied Economics; Tinbergen Institute

Per Hjertstrand

Research Institute of Industrial Economics (IFN)

Date Written: May 20, 2015

Abstract

We provide a nonparametric revealed preference approach to demand analysis based on homothetic efficiency. Homotheticity is a useful restriction but data rarely satisfies testable conditions. To overcome this we provide a way to estimate homothetic efficiency of consumption choices. It generalises Heufer's (2013) two-dimensional concept to arbitrary dimensions and is motivated by a form of rationalisation similar to Halevy et al. (2012). The method allows to recover larger preferred and worse sets and provides considerably more preditive success and discriminatory power against random behaviour. An application to experimental and household expenditure data illustrates the potential of our approach.

Keywords: Demand Theory, Efficiency, Experimental Economics, Homotheticity, Non-parametric Analysis, Revealed Preference, Utility Maximisation

JEL Classification: C14, D11, D12

Suggested Citation

Heufer, Jan and Hjertstrand, Per, Homothetic Efficiency and Test Power: A Non-Parametric Approach (May 20, 2015). Tinbergen Institute Discussion Paper 15-064/I, Available at SSRN: https://ssrn.com/abstract=2611898 or http://dx.doi.org/10.2139/ssrn.2611898

Jan Heufer (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Applied Economics ( email )

Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Per Hjertstrand

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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