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Bounding counterfactual demand with unobserved heterogeneity and endogenous expenditures

Author

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  • Cherchye, Laurens
  • Demuynck, Thomas
  • Rock, Bram De
Abstract
We propose a method to predict rational counterfactual demand responses from repeated cross-sections. We derive bounds on the distribution of counterfactual demands that are consistent with the Weak Axiom of Revealed Preferences, without putting any restriction on the preference heterogeneity across consumers. In contrast to existing methods, we also allow for endogeneity of total expenditures. In addition, the method can readily incorporate restrictions on the income elasticities of the consumption goods, which further enhances its identifying power (i.e. tighter bounds). We illustrate our approach through an application to data drawn from the U.S. Consumer Expenditure Survey.

Suggested Citation

  • Cherchye, Laurens & Demuynck, Thomas & Rock, Bram De, 2019. "Bounding counterfactual demand with unobserved heterogeneity and endogenous expenditures," Journal of Econometrics, Elsevier, vol. 211(2), pages 483-506.
    • Handle: RePEc:eee:econom:v:211:y:2019:i:2:p:483-506
    DOI: 10.1016/j.jeconom.2019.03.002
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    Cited by:

    1. Takashi Kunimoto & Roberto Serrano, 2020. "Rationalizable Incentives: Interim Implementation of Sets in Rationalizable Strategies," Working Papers 2020-15, Brown University, Department of Economics.
    2. Joshua Lanier & John K. -H. Quah, 2024. "Goodness-of-fit and utility estimation: what's possible and what's not," Papers 2405.08464, arXiv.org.
    3. Cosaert, Sam & Lefebvre, Mathieu & Martin, Ludivine, 2022. "Are preferences for work reference dependent or time nonseparable? New experimental evidence," European Economic Review, Elsevier, vol. 148(C).
    4. Thomas Demuynck & Tom Potoms, 2022. "Testing revealed preference models with unobserved randomness: a column generation approach," Working Papers ECARES 2022-42, ULB -- Universite Libre de Bruxelles.
    5. Aguiar, Victor H. & Hjertstrand, Per & Serrano, Roberto, 2020. "A Rationalization of the Weak Axiom of Revealed Preference," Working Paper Series 1321, Research Institute of Industrial Economics.
    6. Roy Allen & John Rehbeck, 2020. "Counterfactual and Welfare Analysis with an Approximate Model," Papers 2009.03379, arXiv.org.
    7. Wilfried Youmbi, 2024. "Nonparametric Analysis of Random Utility Models Robust to Nontransitive Preferences," Papers 2406.13969, arXiv.org.

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    More about this item

    Keywords

    Unobserved heterogeneity; WARP; Endogenous expenditures; Counterfactual demand;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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