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Homothetic Efficiency and Test Power: A Non-Parametric Approach

Author

Listed:
  • Jan Heufer

    (Erasmus University Rotterdam, the Netherlands)

  • Per Hjertstrand

    (Research Institute of Industrial Economics (IFN), Sweden)

Abstract

We provide a nonparametric revealed preference approach to demand analysis based on homothetic efficiency. Homotheticity is a useful restriction but data rarely satisfies testable conditions. To overcome this we provide a way to estimate homothetic efficiency of consumption choices. It generalises Heufer's (2013) two-dimensional concept to arbitrary dimensions and is motivated by a form of rationalisation similar to Halevy et al. (2012). The method allows to recover larger preferred and worse sets and provides considerably more preditive success and discriminatory power against random behaviour. An application to experimental and household expenditure data illustrates the potential of our approach.

Suggested Citation

  • Jan Heufer & Per Hjertstrand, 2015. "Homothetic Efficiency and Test Power: A Non-Parametric Approach," Tinbergen Institute Discussion Papers 15-064/I, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20150064
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    References listed on IDEAS

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    More about this item

    Keywords

    Demand Theory; Efficiency; Experimental Economics; Homotheticity; Non-parametric Analysis; Revealed Preference; Utility Maximisation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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