How different are we? Identifying the degree of revealed preference heterogeneity

I present a nonparametric method to empirically identify the degree of heterogeneity in individual preferences. Using revealed preference conditions for rational consumption behaviour, the method estimates interpersonal preference heterogeneity as the distance between individual preference rankings over a finite set of choice alternatives. An application to US consumption data drawn from the Panel Study of Income Dynamics shows that the method yields informative empirical results on the distance-based heterogeneity measure. I further show the usefulness of the method for applied demand analysis through three empirical applications. Specifically, I take the recovered estimates to form groups of individuals with similar preferences. I demonstrate that employing these preference types as separate units of analysis obtains more informative demand predictions, welfare evaluations and detection of functional misspecification in the case of parametric estimation.