On the meaning of the Critical Cost Efficiency Index

Federico Echenique

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Decision-Making and Behavioral Economics Experimental Behavioral Economics Studies Economic theories and models

Abstract

This note provides a critical discussion of the \textit{Critical Cost-Efficiency Index} (CCEI) as used to assess deviations from utility-maximizing behavior. I argue that the CCEI is hard to interpret, and that it can disagree with other plausible measures of "irrational" behavior. The common interpretation of CCEI as wasted income is questionable. Moreover, I show that one agent may have more unstable preferences than another, but seem more rational according to the CCEI. This calls into question the (now common) use of CCEI as an ordinal and cardinal measure of degrees of rationality.

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References

1972Efficiency Estimation of Production Functions 1973On a System of Inequalities in Demand Analysis: An Extension of the Classical Method 2011The Money Pump as a Measure of Revealed Preference Violations 2015A Measure of Rationality and Welfare 2020Just-noticeable difference as a behavioural foundation of the critical cost-efficiency index 2021Relaxed Optimization: How Close Is a Consumer to Satisfying First-Order Conditions?

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