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Revealed Preference Analysis with Normal Goods: Application to Cost-of-Living Indices

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  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock
  • Khushboo Surana

Abstract

We present a revealed preference methodology for nonparametric demand analysis under the assumption of normal goods. Our methodology is flexible in that it allows for imposing normality on any subset of goods. We show the usefulness of our methodology for empirical welfare analysis through cost-of-living indices. An illustration to US consumption data drawn from the Panel Study of Income Dynamics (PSID) demonstrates that mild normality assumptions can substantially strengthen the empirical analysis. It obtains considerably tighter bounds on cost-of-living indices and a significantly more informative classification of better-off and worse-off individuals after the 2008 financial crisis.

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Khushboo Surana, 2020. "Revealed Preference Analysis with Normal Goods: Application to Cost-of-Living Indices," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 165-188, August.
    • Handle: RePEc:aea:aejmic:v:12:y:2020:i:3:p:165-88
    DOI: 10.1257/mic.20180133
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    Cited by:

    1. Elin Colmsjoe, 2024. "A Flying Start: The Long-Run Effects of Inter Vivos Transfers," CEBI working paper series 24-02, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    2. Martin Browning & Laurens Cherchye & Thomas Demuynck & Bram de Rock & Frederic Vermeulen, 2024. "Spouses with benefits: on match quality and consumption inside households," CEBI working paper series 24-14, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).

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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G01 - Financial Economics - - General - - - Financial Crises

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