Is Utility Transferable? A Revealed Preference Analysis

We provide a revealed preference analysis of the transferable utility hypothesis, which is widely used in economic models. First, we establish revealed preference conditions that must be satisfied for observed group behavior to be consistent with Pareto efficiency under transferable utility. Next, we show that these conditions are easily testable by means of integer programming methods. The tests are entirely nonparametric, which makes them robust with respect to specification errors. Finally, we demonstrate the practical usefulness of our conditions by means of an application to Spanish consumption data. To the best of our knowledge, this is the first empirical test of the transferable utility hypothesis.

Keywords: transferable utility hypothesis, generalized quasi-linearity, nonparametric tests, revealed preferences

JEL Classification: C14, DO1, D11, D12, D13

Suggested Citation: Suggested Citation

Cherchye, Laurens and Demuynck, Thomas and De Rock, Bram, Is Utility Transferable? A Revealed Preference Analysis (February 1, 2011). Available at SSRN: https://ssrn.com/abstract=1773217 or http://dx.doi.org/10.2139/ssrn.1773217