ccei: Computes the critical cost efficiency index

Description

The nonparametric tests of rationality axioms (garp, sarp, and warp) are "sharp" in nature. This means that the tests will only tell us whether the observed data set passed the rationality axioms. However, when the data set fails, it is often useful to know how close the observed behavior is to satisfying the rationality restrictions (see Varian (1990) for an extensive motivation). Over the years, several measures (called goodness-of-fit indices) have been introduced to evaluate the degree to which the data set is consistent with the rationality axiom(s). The most popular goodness-of-fit index is the Critical Cost Efficiency Index; CCEI (also known as the Afriat Efficiency Index; AEI) proposed by Afriat (1973). The CCEI is defined as the maximal value of the efficiency level \(e\) such that the data set is consistent with GARP. Intuitively, this measure indicates the degree to which the set of demand observations is consistent with GARP. This function computes the CCEI following the binary search algorithm described in Varian (1990). Optionally, the user can specify the axiom (WARP, SARP, or GARP) for which the CCEI needs to be computed. When no axiom is specified, the function takes the default option as GARP.

Usage

ccei(p, q, model = "GARP")

Arguments

A \(T X N\) matrix of observed prices where each row corresponds to an observation and each column corresponds to a consumption category. \(T\) is the number of observations and \(N\) is the number of consumption categories.

A \(T X N\) matrix of observed quantities where each row corresponds to an observation and each column corresponds to a consumption category.\(T\) is the number of observations and \(N\) is the number of consumption categories.

model

Specifies which axiom (GARP, SARP, or WARP) should be used to compute the CCEI. The default value is "GARP" which computes the usual CCEI (also known as the Afriat efficiency index, AEI) proposed by Afriat (1973).

Value

The function returns \(e^*\) which is the highest efficiency level at which the data satisfy the given axiom. For instance, if the given model is "GARP", the function returns the maximal value of the efficiency level \(e\) such that the data satisfy \(e\)GARP.

References

Afriat, Sydney N. "On a system of inequalities in demand analysis: an extension of the classical method." International economic review (1973): 460-472.
Varian, Hal R. "Goodness-of-fit in optimizing models." Journal of Econometrics 46, no. 1-2 (1990): 125-140.

Examples

Run this code

# NOT RUN {
# define a price matrix
p = matrix(c(4,4,4,1,9,3,2,8,3,1,
8,4,3,1,9,3,2,8,8,4,
1,4,1,8,9,3,1,8,3,2),
nrow = 10, ncol = 3, byrow = TRUE)

# define a quantity matrix
q = matrix(c( 1.81,0.19,10.51,17.28,2.26,4.13,12.33,2.05,2.99,6.06,
5.19,0.62,11.34,10.33,0.63,4.33,8.08,2.61,4.36,1.34,
9.76,1.37,36.35, 1.02,3.21,4.97,6.20,0.32,8.53,10.92),
nrow = 10, ncol = 3, byrow = TRUE)

# compute ccei for GARP
ccei(p,q, model = "GARP")

# compute ccei for SARP
ccei(p,q, model = "SARP")

# }