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Experimental Economics

, Volume 18, Issue 3, pp 356–365 | Cite as

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

  • James H. Murphy
  • Samiran Banerjee
Original Paper
  • 278 Downloads

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

Afriat Critical cost efficiency index Rationality Revealed preference 

JEL Classification

D01 D03 D11 D12 

Notes

Acknowledgments

We thank Jordi Brandts, the editors, and two anonymous referees for helpful comments. We also thank Christian Vossler for comments on an earlier draft of this paper and James Andreoni and Jim Miller; Syngjoo Choi, Raymond Fisman, Douglas Gale, and Shachar Kariv; and William Harbaugh, Kate Krause, and Timothy Berry for their data.

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Copyright information

© Economic Science Association 2014

Authors and Affiliations

  1. 1.Department of Economics, Richards College of BusinessUniversity of West GeorgiaCarrolltonUSA
  2. 2.Department of EconomicsEmory UniversityAtlantaUSA

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