Non-parametric Test of Revealed Preference for Rational Behavior of Consumers: Urban Households

Abstract

Non-parametric test of revealed preference identifies consumers' preferences by comparing their choices in different times. Unlike the parametric tests, non-parametric test means that no parameter is estimated and no functional form is imposed on the utility and/or demand function. If a set of consumption data satisfies generalized axiom of revealed preference (GARP) then there exists a non-satiated, continuous, concave, monotonic utility that rationalizes the data set. Existence of such utility function means that consumer behavior is rational. In this study, urban households' aggregate consumption data - involving 20 categories and subcategories – are used to investigate the rational behavior hypothesis in period 1965-2002. The findings indicate that rational behavior hypothesis is reliable and urban households' aggregate consumption data may be rationalized by a neoclassical utility function.

Keywords

• garp
• neoclassical utility function
• afriat theory
• afriat index