Hostname: page-component-cb9f654ff-5jtmz Total loading time: 0 Render date: 2025-08-21T15:47:04.389Z Has data issue: false hasContentIssue false
  • English
  • Français

A caveat for the application of the critical cost efficiency index in induced budget experiments

Published online by Cambridge University Press:  14 March 2025

James H. Murphy  and
Samiran Banerjee
James H. Murphy*
Affiliation:
Department of Economics, Richards College of Business, University of West Georgia, Carrollton, GA 30118, USA
Samiran Banerjee*
Affiliation:
Department of Economics, Emory University, Atlanta, GA 30322-2240, USA
*
jmurphy@westga.edu
sbaner3@emory.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Afriat’s (Int Econ Rev 14(2): 460–472, 1973) critical cost efficiency index is often used to measure the extent to which experimental choice data violate the axioms of revealed preference. Under certain conditions, the index yields a value of one—which typically signifies rational choice—when, in fact, the choice violates the axioms. We term this a cost efficient violation (CEV) of the axioms, clarify the conditions under which it arises, and find that CEVs comprise the majority of violations in three of four studies reviewed. We suggest changes in experiment design to eliminate or reduce the likelihood of CEVs.

Keywords

AfriatCritical cost efficiency indexRationalityRevealed preference

JEL classification

D01: Microeconomic Behavior: Underlying Principles D12: Consumer Economics: Empirical Analysis D11: Consumer Economics: Theory

Information

Type
Original Paper
Information
Experimental Economics , Volume 18 , Issue 3 , September 2015 , pp. 356 - 365
Copyright
Copyright © 2014 Economic Science Association

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Afriat, SN (1973). On a system of inequalities in demand analysis: An extension of the classical method. International Economic Review, 14(2), 460–472. 10.2307/2525934CrossRefGoogle Scholar
Afriat, SN (1987). Logic of choice and economic theory, Oxford: Clarendon Press 10.1093/0198284616.001.0001CrossRefGoogle Scholar
Andreoni, J, & Miller, J (2002). Giving according to GARP: An experimental test of the consistency of preferences for altruism. Econometrica, 70(2), 737–753. 10.1111/1468-0262.00302CrossRefGoogle Scholar
Banerjee, S, & Murphy, JH (2006). A simplified test for preference rationality of two-commodity choice. Experimental Economics, 9(1), 67–75. 10.1007/s10683-006-4313-6CrossRefGoogle Scholar
Banerjee, S, & Murphy, JH (2011). Do rational demand functions differ from irrational ones? Evidence from an induced budget experiment. Applied Economics, 43(26), 3863–3882. 10.1080/00036841003724486CrossRefGoogle Scholar
Becker, GS (1962). Irrational behavior and economic theory. Journal of Political Economy, 70(1), 1–13. 10.1086/258584CrossRefGoogle Scholar
Bronars, SG (1987). The power of nonparametric tests of preference maximization. Econometrica, 55(3), 693–698. 10.2307/1913608CrossRefGoogle Scholar
Choi, S, Fisman, R, Gale, D, & Kariv, S (2007). Consistency and heterogeneity of individual behavior under uncertainty. American Economic Review, 97(5), 1921–1938. 10.1257/aer.97.5.1921CrossRefGoogle Scholar
Harbaugh, WT, Krause, K, & Berry, TR (2001). GARP for kids: On the development of rational choice behavior. American Economic Review, 91(5), 1539–1545. 10.1257/aer.91.5.1539CrossRefGoogle Scholar
Matzkin, R, & Richter, M (1991). Testing strictly concave rationality. Journal of Economic Theory, 53(2), 287–303. 10.1016/0022-0531(91)90157-YCrossRefGoogle Scholar
Rose, H (1958). Consistency of preference: The two-commodity case. Review of Economic Studies, 25(2), 124–125. 10.2307/2296210CrossRefGoogle Scholar
Sippel, R (1997). An experiment on the pure theory of consumer’s behaviour. The Economic Journal, 107(444), 1431–1444. 10.1111/j.1468-0297.1997.tb00056.xCrossRefGoogle Scholar
Varian, HR (1982). The nonparametric approach to demand analysis. Econometrica, 50(4), 945–973. 10.2307/1912771CrossRefGoogle Scholar