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A Kinky Consistency: Experimental Evidence of Behavior under Linear and Nonlinear Budget Constraints

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  • Emiliano Huet-Vaughn
  • Ethan M. L. McClure
  • Juan Carlos Suárez Serrato

Abstract

Individuals face nonlinear incentives in myriad situations. We test a fundamental assumption in such settings: that individuals display stable preferences when facing linear and nonlinear incentives. We use a laboratory experiment to characterize how revealed preferences are affected by changes in the budget set environment. Choices under kinked budgets exhibit the same very high levels of internally consistent behavior as they do under linear budgets. However, for about half the subjects, choices across settings are inconsistent with the maximization of a stable preference. Subjects displaying arbitrary consistency exhibit large and significant changes in utility parameters, risk premiums, and price elasticities across settings.

Suggested Citation

  • Emiliano Huet-Vaughn & Ethan M. L. McClure & Juan Carlos Suárez Serrato, 2024. "A Kinky Consistency: Experimental Evidence of Behavior under Linear and Nonlinear Budget Constraints," American Economic Journal: Microeconomics, American Economic Association, vol. 16(3), pages 424-458, August.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:3:p:424-58
    DOI: 10.1257/mic.20220086
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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