Is Utility Transferable? A Revealed Preference Analysis

L.J.H. Cherchye, T. Demuynck, B. de Rock

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Abstract

We provide a revealed preference analysis of the transferable utility hypothesis, which is widely used in economic models. First, we establish revealed preference conditions that must be satisfied for observed group behavior to be consistent with Pareto efficiency under transferable utility. Next, we show that these conditions are easily testable by means of integer programming methods. The tests are entirely nonparametric, which makes them robust with respect to specification errors. Finally, we demonstrate the practical usefulness of our conditions by means of an application to Spanish consumption data. To the best of our knowledge, this is the first empirical test of the transferable utility hypothesis.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Volume2011-018
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-018

Keywords

  • transferable utility hypothesis
  • generalized quasi-linearity
  • nonparamet- ric tests
  • revealed preferences

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    Cherchye, L. J. H., Demuynck, T., & de Rock, B. (2011). Is Utility Transferable? A Revealed Preference Analysis. (CentER Discussion Paper; Vol. 2011-018). Econometrics.