Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1327: Testing for Weak Separability and Utility Maximization with Incomplete Adjustment

Per Hjertstrand (), James L. Swofford () and Gerald A. Whitney ()
Additional contact information
Per Hjertstrand: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
James L. Swofford: Department of Economics and Finance, Postal: University of South Alabama
Gerald A. Whitney: Department of Economics and Finance, Postal: University of New Orleans

Abstract: We develop models for weakly separable utility maximization with incomplete adjustment. By allowing for incomplete adjustment, these models account for the decision maker’s inability to instantaneously adjust to optimal allocations of demanded goods and assets. This is especially important when modelling preferences for durable goods and financial/monetary assets. We propose computationally attractive nonparametric revealed preference procedures to test the models using observed data on prices and quantities. An empirical application shows that it is important to account for incomplete adjustment in consumer demand models of durable consumption goods.

Keywords: Aggregation; Incomplete Adjustment; Revealed Preference; Utility maximization

JEL-codes: C14; C60; D01; D10

Language: English

44 pages, First version: March 25, 2020. Revised: May 30, 2023.

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