Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: This paper investigates the problem of testing and calibrating models of individual decision making. We consider a consumption space equipped with an endogenous notion of abstract ‘numeraire,' and characterize those preferences for which the quantity of numeraire needed to compensate an agent between a pair of alternatives provides a consistent, cardinal measure of the intensity of preference. This framework includes many well-known preferences over classical commodity spaces, finite or infinite horizon consumption streams, and a wide range of models of preference over uncertainty and risk as special cases. For data consisting of observed or experimentally elicited compensation differences, we develop a least squares theory for quantifying a model's predictive accuracy and estimating underlying parameters. We additionally provide a general class of explicit, non-parametric statistical tests of rationalizability by particular models for stochastic data. Applications to model selection, welfare analysis and elicitation of subjective beliefs are given.

For more information, or if you are interested in attending this online seminar, please contact Barbara Estrada by email at [email protected].