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A Kinky Consistency: Experimental Evidence of Behavior under Linear and Non-Linear Budget Constraints
A Kinky Consistency: Experimental Evidence of Behavior under Linear and Non-Linear Budget Constraints
Emiliano Huet-Vaughn
Ethan M.L. McClure
Juan Carlos Suárez Serrato
American Economic Journal: Microeconomics (Forthcoming)
Abstract
We test a central assumption of economic analysis: that individuals display
stable preferences across settings. Motivated by the fact that individuals face non-linear
budget constraints in myriad situations, we use a laboratory experiment to
characterize how revealed preferences are affected by changes in the complexity of
the budget set environment. We find that choices under kinked (piece-wise linear
and convex) budgets exhibit a similar degree of rationality as choices under linear
budgets—with very high levels of internally consistent behavior in each setting.
However, for about half the subjects, individual choices across settings are inconsistent
with the maximization of a stable SARP-satisfying preference. Relative to
those who act consistently across settings, subjects displaying such arbitrary consistency
exhibit large and significant changes in utility parameters, risk premiums,
and price elasticities across settings. Finally, we show that subjects with initially
more sophisticated decision rules are most susceptible to changes in complexity.
