The Money Pump as a Measure of Revealed Preference Violations

  title={The Money Pump as a Measure of Revealed Preference Violations},
  author={Federico Echenique and Matthew Shum},
We introduce a measure of the severity of violations of the revealed preference axioms, which we call the money pump index (MPI). The measure uses the idea that a consumer who violates the axioms is subject to being exploited as a money pump. The MPI is the dollar amount that can be extracted from a consumer who behaves irrationally. The MPI can be interpreted as a statistical test for the hypothesis that a consumer is rational, when behavior is observed with error. We carry out an empirical… CONTINUE READING
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