Relaxed Optimization: Ε-Rationalizability and the Foc-Departure Index in Consumer Theory

50 Pages Posted: 24 Feb 2020

See all articles by Geoffroy de Clippel

Geoffroy de Clippel

Brown University - Department of Economics

Kareen Rozen

Brown University - Department of Economics

Date Written: July 1, 2019

Abstract

We propose relaxing the first-order conditions in optimization to approximate rational consumer choice. Departures from the FOCs are assessed using an axiomatically founded measure that is also interpretable in terms of a money-pump multiplier. The framework encompasses measurement errors, information unobservable to the modeler, and consumer misperception. We develop testable implications for demand data, including for subclasses of regular utility functions, and develop the FOC-Departure Index (FDI), which is applicable in all contexts where the first-order approach is meaningful. We extend these ideas to convex budget sets. Our analysis extends to non-convex preferences under a narrower interpretation of price misperception.

Suggested Citation

de Clippel, Geoffrey and Rozen, Kareen, Relaxed Optimization: Ε-Rationalizability and the Foc-Departure Index in Consumer Theory (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3527048 or http://dx.doi.org/10.2139/ssrn.3527048

Geoffrey De Clippel (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Kareen Rozen

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
4
Abstract Views
56
PlumX Metrics