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How Demanding Is the Revealed Preference Approach to Demand?

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Abstract:

A well-known problem with revealed preference methods is that when data are found to satisfy their restrictions it is hard to know whether this should be viewed as a triumph for economic theory, or a warning that these conditions are so undemanding that almost anything goes. This paper allows researchers to make this distinction. Our approach uses an axiomatic characterization of a measure of predictive success due to Selten (1991). We illustrate the idea using a panel dataset. The results show that this approach can lead us to radically reassess our view of the empirical performance of economic theory.

Document Type: Research Article

DOI: http://dx.doi.org/10.1257/aer.101.6.2782

Publication date: October 1, 2011

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