Revealed Preference Analysis With Normal Goods: Application to Cost of Living Indices

31 Pages Posted: 8 May 2018

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)

Khushboo Surana

KU Leuven

Date Written: April 13, 2018

Abstract

We present a revealed preference methodology for nonparametric demand analysis under the assumption of normal goods. Our methodology is flexible in that it allows for imposing normality on any subset of goods. We show the usefulness of our methodology for empirical welfare analysis through cost of living indices. An illustration to US consumption data drawn from the Panel Study of Income Dynamics (PSID) demonstrates that mild normality assumptions can substantially strengthen the empirical analysis. It obtains considerably tighter bounds on cost of living indices, and a significantly more informative classification of better-off and worse-off individuals after the 2008 financial crisis.

Keywords: nonparametric demand analysis, revealed preferences, normal goods, individual welfare analysis, cost of living indices

JEL Classification: C14, D01, D11, D60

Suggested Citation

Cherchye, Laurens and Demuynck, Thomas and De Rock, Bram and Surana, Khushboo, Revealed Preference Analysis With Normal Goods: Application to Cost of Living Indices (April 13, 2018). Available at SSRN: https://ssrn.com/abstract=3167192 or http://dx.doi.org/10.2139/ssrn.3167192

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) ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

Khushboo Surana

KU Leuven ( email )

Oude Markt 13
Leuven, 3000
Belgium

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