A Rationalization of the Weak Axiom of Revealed Preference

Bravo Working Paper # 2020-016

IFN Working Paper No. 1321

64 Pages Posted: 19 Mar 2020 Last revised: 23 Mar 2020

See all articles by Victor Aguiar

Victor Aguiar

Western University (University of Western Ontario)

Per Hjertstrand

Research Institute of Industrial Economics (IFN)

Roberto Serrano

Brown University

Date Written: February 24, 2020

Abstract

We offer a rationalization of the weak axiom of revealed preference (WARP) and of the weak generalized axiom of revealed preference (WGARP) for both finite and infinite data sets of consumer choice. We call it maximin rationalization, in which each pairwise choice is associated with a local utility function. We develop its associated revealed-preference theory. We show that preference recoverability and welfare analysis à la Varian (1982) may not be informative enough when the weak axiom holds but when consumers are not utility maximizers. In addition, we show that counterfactual analysis may fail with WGARP/WARP. We clarify the reasons for these failures and provide new informative bounds for the consumer’s true preferences, as well as a new way to perform counterfactual analysis. Finally, by adding the Gorman form and quasilinearity restrictions to the “local” utility functions, we obtain new characterizations of the choices of the Shafer (1974) nontransitive consumer and those choices satisfying the law of demand.

Keywords: consumer choice, revealed preference, maximin rationalization, nonconvex preferences, reference-dependent utility, law of demand

JEL Classification: C60, D10

Suggested Citation

Aguiar, Victor and Hjertstrand, Per and Serrano, Roberto, A Rationalization of the Weak Axiom of Revealed Preference (February 24, 2020). Bravo Working Paper # 2020-016 , IFN Working Paper No. 1321, Available at SSRN: https://ssrn.com/abstract=3543674 or http://dx.doi.org/10.2139/ssrn.3543674

Victor Aguiar

Western University (University of Western Ontario) ( email )

1151 Richmond
London, Ontario N6A5C2
Canada

Per Hjertstrand

Research Institute of Industrial Economics (IFN) ( email )

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

Roberto Serrano (Contact Author)

Brown University ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-1036 (Phone)
401-863-1970 (Fax)

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