The Money Pump as a Measure of Revealed Preference Violations

Federico Echenique · Sang Mok Lee · Matthew Shum

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Decision-Making and Behavioral Economics Economics of Agriculture and Food Markets Economic and Environmental Valuation

Abstract

We introduce a measure of the severity of violations of the revealed preference axioms, the money pump index (MPI). The MPI is the amount of money one can extract from a consumer who violates the axioms. It is also a statistical test for the hypothesis that a consumer is rational when behavior is observed with error. We present an application using a panel data set of food expenditures. The data exhibit many violations of the axioms. Mostly, the MPI for these violations is small. The MPI indicates that the hypothesis of consumer rationality cannot be rejected.

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References

1980Economics and Consumer Behavior 1938A Note on the Pure Theory of Consumer's Behaviour 2002Giving According to GARP: An Experimental Test of the Consistency of Preferences for Altruism 2005Oxford: Oxford University 1962Irrational Behavior and Economic Theory 1982The Nonparametric Approach to Demand Analysis 1967The Construction of Utility Functions from Expenditure Data 2005Measuring the Implications of Sales and Consumer Inventory Behavior

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2015A Measure of Rationality and Welfare 2018Behavioral Public Economics 2018Parametric Recoverability of Preferences 2012Choice by sequential procedures 2016Measuring Rationality with the Minimum Cost of Revealed Preference Violations 2012Behavioral Public Economics 2022Robust Screens for Noncompetitive Bidding in Procurement Auctions

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