The Review of Economics and Statistics Vol. 105 No. 4 2023
Relaxed Optimization: How Close Is a Consumer to Satisfying First-Order Conditions?
Abstract
We propose relaxing the first-order conditions in optimization to approximate rational consumer choice. We assess the magnitude of departures with a new, axiomatically founded measure that admits multiple interpretations. Standard inequality tests of rationality for any given reference class of preferences can be conveniently repurposed to measure goodness-of-fit with that class. Another advantage of our approach is that it is applicable in any context where the first-order approach is meaningful (e.g., convex budget sets arising from progressive taxation). We apply these ideas to shed new light on existing portfolio-choice data.
- DOI
- 10.1162/rest_a_01088
- Volume
- 105
- Issue
- 4
- Pages
- 883-898
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref