DP13580 Mutually Consistent Revealed Preference Demand Predictions

Author(s): Abigail Adams
Publication Date: March 2019
Keyword(s): Demand estimation, mixed integer programming, Revealed Preference
JEL(s): C60, D11, D12
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13580

Revealed preference restrictions are increasingly used to predict demand behaviour at new budgets of interest and as shape restrictions in nonparametric estimation exercises. However, the restrictions imposed are not sufficient for rationality when predictions are made at multiple budgets. I highlight the nonconvexities in the set of predictions that arise when making multiple predictions. I develop a mixed integer programming characterisation of the problem that can be used to impose rationality on multiple predictions. The approach is applied to the UK Family Expenditure Survey to recover rational demand predictions with substantially reduced computational resources compared to known alternatives.