Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5100048 | Journal of Economic Theory | 2017 | 39 Pages |
Abstract
Given any observed demand behavior -by means of a demand function-, we quantify by how much it departs from rationality. The measure of the gap is the smallest Frobenius norm of the correcting matrix function that would yield a Slutsky matrix with its standard rationality properties (symmetry, singularity, and negative semidefiniteness). As a result, we are able to suggest a useful classification of departures from rationality, corresponding to three anomalies: inattentiveness to changes in purchasing power, money illusion, and violations of the compensated law of demand. Errors in comparative-statics predictions from assuming rationality are decomposed as the sum of a behavioral error (due to the agent) and a specification error (due to the modeller). Illustrations are provided using several bounded rationality models.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Victor H. Aguiar, Roberto Serrano,