Working Paper Series
What Do Revealed Preference Axioms Reveal about Elasticities of Demand?
() and Barry E. Jones
Abstract: It is well-known that observed data on prices and
quantities of a set of goods is consistent with rational choice if the data
satisfy revealed preference. In this paper, we derive estimators for demand
and substitution elasticities at the observed data points for datasets
satisfying the Strong version of the Strong Axiom of Revealed Preference
(SSARP) from Chiappori and Rochet (1987). We find that these estimators are
identified only up to a strictly positive parameter, which must be small
enough that the utility function rationalizing the dataset satisfies
certain properties. We show that the estimated elasticities of substitution
approach zero in the limit as this parameter approaches zero. Thus, if the
dataset satisfies SSARP, then it is consistent with negligible
substitutability between any pair of goods at all observed data points. Our
estimators are derived directly from results in Brown and Shannon (2000)
and Brown and Kannan (2005).
Keywords: Strong Axiom of Revealed Preference; Afriat Inequalities; Elasticities of Demand; (follow links to similar papers)
JEL-Codes: C61; D12; (follow links to similar papers)
16 pages, September 4, 2013
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