A Measure of Rationality and Welfare

Recognition Program

Authors: Jose Apesteguia and Miguel Ángel Ballester

Journal of Political Economy, Vol. 123, No 6, 1278-1310, December, 2015

There is evidence showing that individual behavior often deviates from the classical principle of maximization. This evidence raises at least two important questions: (i) how severe the deviations are and (ii) which method is the best for extracting relevant information from choice behavior for the purposes of welfare anal- ysis. In this paper we address these two questions by identifying from a foundational analysis a new measure of the rationality of individuals that enables the analysis of individual welfare in potentially inconsistent subjects, all based on standard revealed preference data. We call such measure minimal index.

This paper originally appeared as Barcelona GSE Working Paper 573
This paper is acknowledged by the Barcelona GSE Research Recognition Program