In Vino Veritas: The Economics of Drinking

It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one’s actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a “social lubricant” and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a tradeoff between the effi ciency gains due to the signaling eff ect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is effi cient, social norms or laws can raise effi ciency by legalizing only one drug.Asymmetric Information, Drinking, Drug Consumption, Signaling, Social Norms

A Geometric Measure for the Violation of Utility Maximization

Revealed Preference offers nonparametric tests for whether consumption observations can be rationalized by a utility function. If a consumer is inconsistent with GARP, we might need a measure for the severity of inconsistency. One widely used measure is the Afriat efficiency index (AEI).We propose a new measure based on the extent to which the indifference surfaces intersect the budget hyperplanes. The measure is intuitively appealing and, as a cutoff- rule evaluated by Monte Carlo experiments, performs very well compared to the AEI. The results suggest that the new measure is better suited to capture small deviations from utility maximation.Consumer choice, efficiency index,GARP, nonparametric tests, revealed preference

Stochastic Revealed Preference and Rationalizability

This paper explorers rationalizability issues for finite sets of observations of stochastic choice in the framework introduced by Bandyopadhyay et al. (JET, 1999). Is is argued that a useful approach is to consider indirect preferences on budgets instead of direct preferences on commodity bundles. Stochastic choices are rationalizable in terms of stochastic orderings on the normalized price space if and only if there exits a solution to a linear feasibility problem. Together with the weak axiom of stochastic revealed preference the existence of a solution implies rationalizability in terms of stochastic orderings on the commodity space. Furthermore it is shown that the problem of finding sufficiency conditions for binary choice probabilities to be rationalizable bears similarities to the problem considered here.Stochastic choice, rationalizability, revealed preference, weak axiom of stochastic revealed preference, revealed favorability

Revealed Preference and the Number of Commodities

This work consists of two parts: First, it is shown that for a two-dimensional commodity space any homothetic utility function that rationalizes each pair of observations in a set of consumption data also rationalizes the entire set of observations. The result is stated as a pairwise version of Varian’s Homothetic Axiom of Revealed Preference and is used to provide a simplified nonparametric test of homotheticity. In the second part a unifying proof technique is presented to show that the Weak Axiom of Revealed Preference (WARP) implies the Strong Axiom of Revealed Preference (SARP) for two commodities yet not for more commodities. It also shows that preference cycles can be of arbitrary length.While these results are already known, the proof here generalizes and unifies the existing ones insofar as it gives necessary and sufficient conditions for preference cycles to exist. It is then shown that in two dimensions the necessary condition cannot be fulfilled, whereas in more than two dimensions the sufficient conditions can always be met. The proof admits an intuitive understanding of the reason by giving a geometric interpretion of preference cycles as paths on indifference surfaces.Homotheticity, nonparametric tests, preference cycles, revealed preference, SARP,WARP

The Washroom Game

This article analyses a game where players sequentially choose either to become insiders and pick one of finitely many locations or to remain outsiders. They will only become insiders if a minimum distance to the next player can be assured; their secondary objective is to maximise the minimal distance to other players. This is illustrated by considering the strategic behaviour of men choosing from a set of urinals in a public lavatory. However, besides very similar situations (e.g. settling of residents in a newly developed area, the selection of food patches by foraging animals, choosing seats in waiting rooms or lines in a swimming pool), the game might also relevant to the problem of placing billboards attempting to catch the attention of passers-by or similar economic situations. In the non-cooperative equilibrium, all insiders behave as if they cooperated with each other and minimised the total number of insiders. It is shown that strategic behaviour leads to an equilibrium with substantial underutilization of available locations. Increasing the number of locations tends to decrease utilization. The removal of some locations which leads to gaps can not only increase relative utilization but even absolute maximum capacity.Efficient design of facilities; location games; privacy concerns; strategic entry prevention; unfriendly seating arrangement; urinal problem

Stochastic Dominance and Nonparametric Comparative Revealed Risk Aversion

It is shown how to test revealed preference data on choices under uncertainty for consistency with first and second order stochastic dominance (FSD or SSD). The axiom derived for SSD is a necessary and sufficient condition for risk aversion. If an investor is risk averse, stochastic dominance relations can be combined with revealed preference relations to recover a larger part of an investor‘s preference. Interpersonal comparison between investors can be based on intersections of revealed preferred and worse sets. Using a variant of Yaari‘s (1969) defi nition of “more risk averse than”, it is shown that it is sufficient to compare only the revealed preference relations of two investors. This makes the approach operational given a fi nite set of observations. The central rationalisability theorem provides strong support for this approach to comparative risk aversion. The entire analysis is kept completely nonparametric and can be used as an alternative or complement to parametric approaches and as a robustness check. The approach is illustrated with an application to experimental data of by Choi et al. (2007). Most subjects come close to SSD-rationality, and most subjects are comparable with each other. The distribution of risk attitudes in the population can be described by comparing subjects‘ choices with any given preference, which is also illustrated.Comparative risk aversion; experimental economics; induced budget experiments; interpersonal comparison; nonparametric analysis; portfolio choice; revealed preference; risk preference

Stochastic homothetically revealed preference for tight stochastic demand functions

This paper strengthens the framework of stochastic revealed preferences introduced by Bandyopadhyay et al. (1999, 2004) for stochastic homothetically revealed preferences for tight stochastic demand functions.Homotheticity, Stochastic Revealed Preference

Revealed Preference and the Number of Commodities

This work consists of two parts: First, it is shown that for a two-dimensional commodity space any homothetic utility function that rationalizes each pair of observations in a set of consumption data also rationalizes the entire set of observations. The result is stated as a pairwise version of Varian's Homothetic Axiom of Revealed Preference and is used to provide a simplified nonparametric test of homotheticity. In the second part a unifying proof technique is presented to show that the Weak Axiom of Revealed Preference (WARP) implies the Strong Axiom of Revealed Preference (SARP) for two commodities yet not for more commodities. It also shows that preference cycles can be of arbitrary length.While these results are already known, the proof here generalizes and unifies the existing ones insofar as it gives necessary and sufficient conditions for preference cycles to exist. It is then shown that in two dimensions the necessary condition cannot be fulfilled, whereas in more than two dimensions the sufficient conditions can always be met. The proof admits an intuitive understanding of the reason by giving a geometric interpretion of preference cycles as paths on indifference surfaces

Generating Random Optimising Choices

This paper provides an efficient way to generate a set of random choices on a set of budgets which satisfy the Generalised Axiom of Revealed Preferences (GARP), that is, they are consistent with utility maximisation. The choices are drawn from an approximate uniform distribution on the admissible region on each budget which ensures consistency with GARP, based on a Markovian Monte Carlo algorithm due to Smith (1984). This procedure can be used to extend Bronars' (1987) method as it can be used to approximate the power of tests for conditions for which GARP is a necessary but not sufficient condition (e.g., homotheticity, separability, risk aversion, etc.). For example, it allows to approximate the probability that a set of random choices which happens to satisfy GARP is also consistent with homotheticity. The approach can also be applied to production analysis and nonparametric tests of cost minimisation.Diese Arbeit stellt eine effiziente Methode zur Generierung zufälliger nutzenmaximierender Entscheidungen auf kompetitiven Budgets vor. Die Entscheidungen werden aus einer approximativen Gleichverteilung auf den zulässigen Regionen der Budgets gezogen. Die Methode basiert auf einem Markov-Monte-Carlo Algorithmus (Smith 1984, OR). Die Prozedur kann verwendet werden, um Bronars' Methode (1987, Econometrica) zu erweitern, da sie die Stärke von Tests auf Bedingungen, für die Nutzenmaximierung nur notwendig aber nicht hinreichend ist, approximieren kann. Diese Bedingungen können zum Beispiel Homothetie, Separabilität, oder Risikoaversion sein. Die Methode kann auch in der Produktionstheorie bei nichtparametrischen Tests auf Kostenminimierung angewandt werden

Crime, Inequality, and the Private Provision of Security

In a high-crime environment with many high-income citizens, private security companies which off er protection against crime can fl ourish. In this article crime is modelled as a game where richer victims yield a higher return on crime, but with decreasing returns to crime as more criminals choose crime to supplement their income. Private security providers off er protection against crime and face Cournot competition. The model allows for the analysis of market clearing prices for eff ort against crime. Among the implications of the model are that rising inequality will lead to more expenditure on protection against crime, and that the upper income classes are suff ering from the same or lower crime density than the middle income class. Taking into account the response of criminals and victims, rising inequality can actually lead to less crime if either (i) the legal income opportunity of the marginal criminal increases or (ii) marginal utility from income decreases and richer individuals spend a higher proportion of their income on protection (i.e. protection is a superior good). Often the middle class suff ers from higher crime densities as inequality increases, as the increased spending on protection by the upper class (i) shifts crime to the middle class and (ii) increases market prices for protection, leaving the middle class with less aff ordable protection against crime. Emigration of the middle class can then further increase inequality. This highlights the importance of taking into account the response of individuals against crime and shows that the link between inequality and crime is a complex one.Crime; inequality; competition of security companies; private enforcement of law; private provision of security