Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1321: A Rationalization of the Weak Axiom of Revealed Preference

Victor H. Aguiar (), Per Hjertstrand () and Roberto Serrano ()
Additional contact information
Victor H. Aguiar: Department of Economics, Postal: The University of Western Ontario, London, Ontario, Canada
Per Hjertstrand: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Roberto Serrano: Department of Economics, Postal: Brown University, Providence, Rhode Island, U.S.A.

Abstract: We offer a rationalization of the weak axiom of revealed preference (WARP) and of the weak generalized axiom of revealed preference (WGARP) for both finite and infinite data sets of consumer choice. We call it maximin rationalization, in which each pairwise choice is associated with a local utility function. We develop its associated revealed-preference theory. We show that preference recoverability and welfare analysis à la Varian (1982) may not be informative enough when the weak axiom holds but when consumers are not utility maximizers. In addition, we show that counterfactual analysis may fail with WGARP/WARP. We clarify the reasons for these failures and provide new informative bounds for the consumer’s true preferences, as well as a new way to perform counterfactual analysis. Finally, by adding the Gorman form and quasilinearity restrictions to the “local” utility functions, we obtain new characterizations of the choices of the Shafer (1974) nontransitive consumer and those choices satisfying the law of demand.

Keywords: Consumer choice; Revealed preference; Maximin rationalization; Nonconvex preferences; Reference-dependent utility; Law of demand

JEL-codes: C60; D10

63 pages, February 26, 2020

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