Working Paper: CEPR ID: DP13580
Authors: Abigail Adams
Abstract: Revealed preference restrictions are increasingly used to predict demand behaviour at new budgets of interest and as shape restrictions in nonparametric estimation exercises. However, the restrictions imposed are not sufficient for rationality when predictions are made at multiple budgets. I highlight the nonconvexities in the set of predictions that arise when making multiple predictions. I develop a mixed integer programming characterisation of the problem that can be used to impose rationality on multiple predictions. The approach is applied to the UK Family Expenditure Survey to recover rational demand predictions with substantially reduced computational resources compared to known alternatives.
Keywords: revealed preference; mixed integer programming; demand estimation
JEL Codes: C60; D11; D12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| revealed preference restrictions (D11) | predictions made at multiple budgets (H68) |
| predictions made at multiple budgets (H68) | jointly rational predictions (D80) |
| mixed integer programming (MIP) characterization (C61) | imposition of rationality constraints (D01) |
| imposition of rationality constraints (D01) | recover rational demand predictions (R22) |