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The Empirical Content of Binary Choice Models

Published version
Peer-reviewed

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Authors

Bhattacharya, Debopam  ORCID logo  https://orcid.org/0000-0002-2870-7898

Abstract

An important goal of empirical demand analysis is choice and welfare prediction on counterfactual budget sets arising from potential policy-interventions. Such predictions are more credible when made without arbitrary functional-form/distributional assumptions, and instead based solely on economic rationality, i.e. that choice is consistent with utility maximization by a heterogeneous population. This paper investigates nonparametric economic rationality in the empirically important context of binary choice. We show that under general unobserved heterogeneity, economic rationality is equivalent to a pair of Slutsky-like shape-restrictions on choice-probability functions. The forms of these restrictions differ from Slutsky-inequalities for continuous goods. Unlike McFadden-Richter's stochastic revealed preference, our shape-restrictions (a) are global, i.e. their forms do not depend on which and how many budget-sets are observed, (b) are closed-form, hence easy to impose on parametric/semi/non-parametric models in practical applications, and (c) provide computationally simple, theory-consistent bounds on demand and welfare predictions on counterfactual budget-sets.

Description

Keywords

38 Economics, 3801 Applied Economics, 3802 Econometrics, 3803 Economic Theory, 10 Reduced Inequalities

Journal Title

Econometrica: journal of the Econometric Society

Conference Name

Journal ISSN

0012-9682
1468-0262

Volume Title

89

Publisher

Wiley-Blackwell
Sponsorship
European Research Council (681565)
European Research Council