Choices from linear budget sets are often used to recover consumer's preferences. The classic method uses revealed preference theory to construct non-parametric bounds on the indifference curve that passes through a given bundle. We show that these bounds do not apply to non-convex preferences, and therefore may lead to erroneous predictions and welfare analysis. We suggest an alternative that is based solely on the assumption of monotonicity of preferences.
Bibliographical noteFunding Information:
We thank the Co-Editor, an anonymous Associate Editor, two anonymous reviewers and Hiroki Nishimura for insightful comments. Oriel Nofekh provided excellent research assistance. Yoram Halevy gratefully acknowledges financial support from SSHRC (grants numbers 435-2012-0577 and 410-2009-1062). Dotan Persitz gratefully acknowledges the support of the ISF (grant number 1390/14) and the Henry Crown Institute for business research in Israel. Lanny Zrill gratefully acknowledges financial support from SSHRC Doctoral Fellowship.
© 2017 Elsevier B.V.
- Generalized axiom of revealed preference
- Non-convex preferences
- Partial identification
- Revealed preferences