A choice function is strictly rational whenever it can be rationalized by a preference relation in a manner such that alternatives in a choice set are strictly preferred to alternatives in the corresponding rejection set. We demonstrate an Extension Theorem which asserts that a preference relation strictly rationalizes the choice function if and only if the choice function satisfies the Weak Axiom of Revealed Preference and the preference relation is an extension of the revealed weak preference relation. Then we consider various applications to rational choice theory.

Estimation of limited dependent variable models with dependent observations has received relatively little attention due to the computational complexity of the maximum likelihood estimator. We develop a computationally attractive and relatively efficient estimator for this case that utilises the orthogonality conditions. The resulting Generalized Conditional Moment (GCM) estimators can be applied with a known or an unknown disturbance covariance matrix. Although the paper considers only the probit model, the approach is easily generalized to other limited dependent variable models.

In a repeated insurance model with differential learning and moral hazard, it is shown that the full-information competitive outcome is implementable when insurers employ a “good-faith” strategy.

This paper presents a novel interpretation of the fact that high nominal interest rates accompany low levels of real GNP. It constructs a model in which money and bonds are both held as a result of legal restrictions on the banking system. Open market operations may increase the equilibrium rate of interest and raise the cost of credit. This increase in the cost of credit causes firms to write labour contracts in which layoffs occur more frequently. The nature of optimal labour contracts is derived explicitly from assumptions about the information that is available to firms and to workers.

This paper develops a model for interdependent demand for health insurance and health care under uncertainty to throw light on the issue of insurance-induced distortions in the demand for health care services. The model is used to empirically analyse the determinants of the choice of health insurance type and seven types of health care services using micro-level data from the 1977–78 Australian Health Survey. Econometric implementation of the model involves, simultaneously, issues of discreteness of choice, selectivity and stochastic dependence between health insurance and utilization. Health status appears to be more important in determining health care service use than health insurance choice, while income appears to be more important in determining health insurance choice than in determining health care service use. For a broad range of health care services both moral hazard and self selection are found to be important determinants of utilization of health care services.