On the rationalizability of observed consumers’ choices when preferences depend on budget sets and (potentially) on anything else

Abstract

We prove that defining consumers’ preferences over budget sets is both necessary and sufficient to make every fully informative and finite set of observed consumption choices rationalizable by a collection of preferences which are transitive, complete, and monotone with respect to own consumption. Our finding has two important theoretical consequences. First, assuming that preferences depend on budget sets is illegitimate under the scientific commitments of revealed preference theory. Second, as long as consumers’ preferences are not defined over budget sets, we can assume that preferences depend on observable objects other than own consumption without compromising the logical possibility to reject the model against observation. We however point out that, despite this logical possibility, in practice it can be almost impossible to reject a model where preferences are defined over objects that depend on budget sets. As an example of this we show that if preferences are defined over consumption choices of other individuals then rationalization fails only in cases of negligible practical interest.Revealed Preferences, Budget Sets, Rational Preferences, Rationalizability