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A caveat for the application of the critical cost efficiency index in induced budget experiments

Published online by Cambridge University Press:  14 March 2025

James H. Murphy  and
Samiran Banerjee
James H. Murphy*
Affiliation:
Department of Economics, Richards College of Business, University of West Georgia, Carrollton, GA 30118, USA
Samiran Banerjee*
Affiliation:
Department of Economics, Emory University, Atlanta, GA 30322-2240, USA
*
[email protected]
[email protected]
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Abstract

Afriat’s (Int Econ Rev 14(2): 460–472, 1973) critical cost efficiency index is often used to measure the extent to which experimental choice data violate the axioms of revealed preference. Under certain conditions, the index yields a value of one—which typically signifies rational choice—when, in fact, the choice violates the axioms. We term this a cost efficient violation (CEV) of the axioms, clarify the conditions under which it arises, and find that CEVs comprise the majority of violations in three of four studies reviewed. We suggest changes in experiment design to eliminate or reduce the likelihood of CEVs.

Keywords

AfriatCritical cost efficiency indexRationalityRevealed preference

JEL classification

D01: Microeconomic Behavior: Underlying Principles D12: Consumer Economics: Empirical Analysis D11: Consumer Economics: Theory
Type
Original Paper
Information
Experimental Economics , Volume 18 , Issue 3 , September 2015 , pp. 356 - 365
Copyright
Copyright © 2014 Economic Science Association

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