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Revealed Preference Analysis with Normal Goods: Application to Cost of Living Indices

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  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock
  • Khushboo Surana

Abstract

We present a revealed preference methodology for nonparametric demand analysis under the assumption of normal goods. Our methodology is exible in that it allows for imposing normality on any subset of goods. We show the usefulness of our methodology for empirical welfare analysis through cost of living indices. An illustration to US consumption data drawn from the Panel Study of Income Dynamics (PSID) demonstrates that mild normality assumptions can substantially strengthen the empirical analysis. In particular, it obtains considerably tighter bounds on cost of living indices, and a significantly more informative classification of better-off and worse-off individuals after the 2008 financial crisis.

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Khushboo Surana, 2018. "Revealed Preference Analysis with Normal Goods: Application to Cost of Living Indices," Working Papers ECARES 2018-08, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:eca:wpaper:2013/269402
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    More about this item

    Keywords

    nonparametric demand analysis; revealed preferences; normal goods; individual welfare analysis; cost of living indices;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G01 - Financial Economics - - General - - - Financial Crises

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