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Slutsky Matrix Norms and the Size of Bounded Rationality

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Abstract

Given any observed demand behavior by means of a demand function, we quantify by how much it departs from rationality. Using a recent elab- oration of the "almost implies near" principle, the measure of the gap is the smallest norm of the correcting matrix that would yield a Slutsky ma- trix with its standard rationality properties (symmetry, singularity, and negative semide niteness). A useful classi cation of departures from ra- tionality is suggested as a result. Variants, examples, and applications are discussed, and illustrations are provided using several bounded rationality models.

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  • Victor H. Aguiar & Roberto Serrano, 2013. "Slutsky Matrix Norms and the Size of Bounded Rationality," Working Papers 2013-16, Brown University, Department of Economics.
    • Handle: RePEc:bro:econwp:2013-16
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    Cited by:

    1. Emmanuel Farhi & Xavier Gabaix, 2020. "Optimal Taxation with Behavioral Agents," American Economic Review, American Economic Association, vol. 110(1), pages 298-336, January.
    2. Victor Aguiar & Roberto Serrano, 2015. "Slutsky Matrix Norms and Revealed Preference Tests of Consumer Behaviour," Working Papers 2015-1, Brown University, Department of Economics.
    3. Salvador Barberà & Alejandro Neme, 2015. "Ordinal Relative Satisficing Behavior: Theory and Experiments," Working Papers 790, Barcelona School of Economics.

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