A Stochastic Choice Approach to Measuring Consistency in Consumption Decisions
Abstract: A stochastic choice model for the classical continuous consumption context, where there are a finite number of goods which can be purchased in any quantity subject to a budget constraint, is introduced. The model has a built-in parameter representing the degree of irrationality / inconsistency displayed by the choices of the consumer. The model is characterized by a version of Luce's indepedence of irrelevant alternatives. An estimator of the irrationality parameter is proposed and it is shown that the estimator can be calculated as the solution of a linear programming problem where the linear programming problem can be seen as a relaxation of the well-known Afriat inequalities. The irrationality parameter for a cross-section of UK households, under the hypothesis that all households have the same utility function, is estimated. The analysis allows for the consideration of the degree to which preferences heterogeneity is important. For many blocks of years there is scant evidence in favor of the notion that the households under study have similar preferences.