Transitivity of Preferences: When Does it Matter?

24 Pages Posted: 25 Nov 2015

See all articles by L. Cherchye

L. Cherchye

KU Leuven; Erasmus Research Institute of Management (ERIM)

Thomas Demuynck

Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE)

Bram de Rock

Katholieke Universiteit Leuven - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics

Date Written: November 2015

Abstract

We define the empirical conditions on prices and incomes under which transitivity of preferences has specific testable implications. In particular, we set out necessary and sufficient requirements for budget sets under which consumption choices can violate SARP (Strong Axiom of Revealed Preferences) but not WARP (Weak Axiom of Revealed Preferences). As SARP extends WARP by additionally imposing transitive preferences, this effectively defines the conditions under which transitivity is separately testable. Our findings have considerable practical relevance, as transitivity conditions are known to substantially aggravate the computational burden of empirical revealed preference analysis. Our characterization takes the form of triangular conditions that must hold for all three-element subsets of normalized prices, and which are easy to verify in practice. We demonstrate their practical use through two short empirical applications.

Keywords: revealed preferences, WARP, SARP, transitive preferences, testable implications

JEL Classification: C14, DO1, D11, D12

Suggested Citation

Cherchye, Laurens and Demuynck, Thomas and de Rock, Bram, Transitivity of Preferences: When Does it Matter? (November 2015). Available at SSRN: https://ssrn.com/abstract=2694952 or http://dx.doi.org/10.2139/ssrn.2694952

Laurens Cherchye (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Thomas Demuynck

Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Bram De Rock

Katholieke Universiteit Leuven - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

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