Revealed Price Preference: Theory and Empirical Analysis

Abstract: To determine the welfare implications of price changes in demand data, we introduce a revealed preference relation over prices. We show that the absence of cycles in this relation characterizes a consumer who trades off the utility of consumption against the disutility of expenditure. Our model can be applied whenever a consumer's demand over a strict subset of all available goods is being analyzed; it can also be extended to settings with discrete goods and nonlinear prices. To illustrate its use, we apply our model to a single-agent data set and to a data set with repeated cross-sections. We develop a novel test of linear hypotheses on partially identified parameters to estimate the proportion of the population who are revealed better off due to a price change in the latter application. This new technique can be used for nonparametric counterfactual analysis more broadly.