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1. MOTIVATION
The objectof this paperis to providea systematictreatmentof the axiomaticstructure
of the theoryof revealedpreference. In particularit is addressedto the followingproblems
in revealedpreferencetheory.
(1) Much of revealedpreferencetheoryhas been concernedwith choicesrestrictedto
certaindistinguishedsubsetsof alternatives,in particularto a class of convex polyhedra
(e.g., " budgettriangles" in the two commoditycase). This restrictionmay have some
rationalefor analyzingthe preferencesof competitiveconsumers,but it makesthe results
unusablefor other types of choices,e.g., of governmentbureaucracies,of voters, of con-
sumersin an imperfectmarket. If the restrictionis removed,the axiomaticstructureof
revealed preferencetheory changes radically. This axiomatic structureis studied in
Sections2-5. In Section6 the rationaleof restrictingthe domainof choicefunctionsand
that of rationalityconditionsis criticallyexamined.
(2) Whilesome revealedpreferencetheoriesare concernedwith element-valuedchoice
functions(i.e., with choice functionsthe range of which is restrictedto unit sets), others
assumeset-valuedchoice functions. It is interestingto analyzethe problemgenerallyin
terms of set-valuedchoice functions and then study the consequenceof an additional
restrictionthat all choicesetsbe unitsets. Section7 is devotedto this additionalrestriction.
(3) Whilerevealedpreferencetheoryhas beenobsessedwith transitivity, certainweaker
requirements havecome to prominencein otherbranchesof choicetheory. It is interesting
to investigatethe conditionsthat guaranteethat a choice function is representableby a
binaryrelationof preferencewhetheror not that relationis transitive. Also the conditions
that ensuretransitivityof strictpreferencethoughnot necessarilyof indifferenceare worth
studying because of the relevanceof this case to demand theory (see Armstrong[1],
Majumdar[14], Luce [13], Georgescu-Roegen[7]) and to the theoryof collectivechoice
(see Pattanaik[15], Sen [18], Inada[11], Fishburn[4]). The axiomaticstructureof these
requirementsis studiedin Sections8-10. This also helps to achievea factorizationof the
conditionsfor full transitivity.
5. EQUIVALENCEOF AXIOMS
This equivalencecan be extendedto cover all the " rationality"conditionsproposed
so far.
(T.3). The followingconditionsare equivalent:
(i) R is an orderingand C(S) is normal;
(ii) R is an orderingand C(S) is normal;
(iii) Weak CongruenceAxiom;
(iv) StrongCongruenceAxiom;
(v) WeakAxiom of RevealedPreference;
(vi) StrongAxiom of RevealedPreference;
(vii) R = R;
and (viii) R = R and C(S) is normal.
Proof. The equivalenceof (i) and (ii) is immediatesince C(S) being normalimplies
R = R.
From(T.1), (i) implies(iii) and (iii) impliesthat R is an ordering. The equivalenceof
(i) and (iii) is completedby showingthat WCA guaranteesthe normalityof the choice
function. Since C(S)c= (S), it is sufficient to show that WCA implies that C(S)(c C(S).
Let y E C(S) while x E (S). Obviously xRy, and hence by WCA, x E C(S).
By definition(iv) implies(iii). To prove the converseassumethat WCA holds and
the antecedent of SCA holds, i.e., y E C(S), x E S, and xWy. Since y E C(S), yRz for all
z in S. Using the notationof Definition14, if x" 'Py, then xn-l'Rz for all z in S since R
is transitivegivenWCA. Thus xn-1 E Q(s'), whereS' is the union of S and the unit set
[xn-1]. Hence xn 'Py implies that xn-1 E C(S'). If, on the other hand, yIxn 1, then
y e Q(S') since y eC(-S). Thus by normalityy c C(S), and by WCA, xn'-e C(S1).
Similarlyxn-2 E C(S2) whereS2 is the union of S' and the unit set [xn-2]. Proceedingthis
way x = x is in the choice set of s'. But if x is in C(S'), then x E C(S), since SC Sn.
Hencex E C(S) and SCA musthold.
Next the equivalence of (iii) and (v). If WARP is violated, then for some x, y E X,
we have xPy and yRx. Since xPy implies that there is an S in K such that x E C(S), y E S,
and y is not in C(S), WCA must be false in view of yRx. Thus WCA implies WARP.
Conversely, let WCA be violated. Then for some x, y e S we have xRy, when y is in C(S)
but x is not in C(S). Evidently xRy and yPx. This is a violation of WARP.
Next, (vi) is taken up. Obviously, (vi) implies (v), since SARP subsumes WARP. On
the other hand, by (T. 1), WCA implies that R is an ordering. Hence WARP, which is
equivalent to WCA, implies that R is an ordering. But by (T.2), R = R in view of WCA.
Hence WARP guarantees that R is an ordering and that xP*y implies xPy for all x, y in X.
But then WARP implies SARP.
Equivalence of (vii) and (iii) is given by (T.2) and that of (viii) and (vii) follows from
the fact that R = R whenever C(S) is normal. This establishes (T.3).
This demonstration of the complete equivalence of all the rationality conditions pro-
posed so far would seem to complete a line of enquiry initiated by Arrow [2] who proved
the equivalence of (ii), (v) and (vi).' Some of the results contained in (T.3) have apparently
been denied and it is worth commenting on a few of the corners. For example, Richter
[16], who has proved the equivalence of SCA and (i), has argued that " it can be shown that
the Congruence Axiom does not imply the Weak Axiom [of revealed preference] and hence
not the Strong" (p. 639). But the difference seems to arise from the fact that Richter
applies Samuelson's and Houthakker's definition of the revealed preference axioms, which
are made with the assumption of element-valued (as opposed to set-valued) choice functions,
to a case where there are a number of best elements in the set (Richter [16], Figure 2, p. 639).
Similarly, Houthakker's [9] argument for the necessity of bringing in the Strong Axiom
of Revealed Preference, rather than making do with the Weak Axiom, arises from the fact
that Houthakker considers a choice function that is defined over certain distinguished sets
only, viz., a class of convex polyhedra representingbudget sets, and which is undefined over
finite subsets of elements. The same is true of Gale's [6] demonstration that WARP does
not imply SARP in a rejoinder to Arrow's paper [2].
Finally, it may be noted that rationality may be identified with the systematic converg-
ence of different interpretations of the preference revealed by a choice function. As is
clear from (T.3), R = R implies complete rationality in the sense of transitivity and normal-
ity, and so does R = R if the choice function is normal. That a primitive concept like the
coincidence of different interpretations of revealed preference can be taken to be a complete
criterion of rationality of choice is of some interest in understanding this problematic
concept.
It is certainly the case that the observed behaviour of the competitive consumer will
include choices only over budget sets. What can then be the operational significance, it
might be asked, of including other subsets in the domain of the choice function? The
significance lies in the fact that the interpretation of observed choices will depend on
whether it is assumed that the rationality axioms would hold over other potential choice
situations as well even though these choices cannot be observed in the competitive market.
For example if it is assumed that the Weak Congruence Axiom would hold over finite
subsets as well, then the observation that x is chosen when y is available in the budget set
and y is chosen when z is in the budget set can be used as a basis for deducing that x is
regarded as at least as good as z even without observing that x is chosen when z is available.
This is because by (T.2) WCA defined over all finite subsets implies that R is transitive.
Thus the interpretationof observed choices will vary with what is assumed about the applic-
ability of the rationality axioms to unobserved choices.
Thus a real difference with operational significance is involved. But it may be argued
that if some choices are never observed how can we postulate rationality axioms for these
choices since we cannot check whether the rationality axioms assumed would hold? This
problem raises important questions about the methodological basis of revealed preference
theory. In particular the following two questions are relevant.
(1) Are the rationality axioms to be used only after establishing them to be true?
(2) Are there reasons to expect that some of the rationality axioms will tend to be
satisfied in choices over " budget sets " but not for other choices?
Suppose a certain axiom is shown to guarantee some rationality results if the axiom
holds over every element in a certain class of subsets of X, i.e., over some domain K* c K.
In order to test this axiom before using, we have to observe choices over every element of
K*. Consider K* as the class of budget sets. We know that any observed choice will be
from K* in the competitive market, but this is not the same thing as saying that choice from
every element of K* will, in fact, be observed. There are an infinite (and uncountable)
number of budget sets even for the two-commodity case and choices only over a few will
be observed. What is then the status of an axiom that is used in an exercise having been
seen to be not violated over a certainproper subset of K*? Clearly it is still an assumption
rather than an established fact. There is, of course, nothing profound in this recognition,
and it is in the nature of the theory of revealed preferencethat the exercise consists of taking
axioms in the strictly logical sense and then deriving analytical results assuming these
axioms to be true. But then the question arises: why assume the axioms to be true only
for " budget sets " and not for others? Such results as the non-equivalence of the " weak"
and the " strong " axioms relate to this issue.
This takes us to question (2). Are there reasons to expect the fulfilment of these
axioms over budget sets but not over other subsets of K? No plausible reasoning seems to
have been put forward to answer the question in the affirmative. The differencelies in the
ability to observe violation of axioms and not in any inherent reason to expect violations
in one case and not in the other. But even for K* not all choices will be observed Why
then restrict the domain of an axiom to K* only and not to entire K when (a) verification
is possible in fact neither for K nor for K*, and (b) there are no a priori reasons to expect
the axiom to hold over K* but not over (K- K*)?
The validity of the theorems obtained does not, of course, depend on whether we find
the above line of argument to be convincing, but the importance of the results clearly does,
especially for demand theory.
Two final remarksmay be made. First, while it is not requiredthat the domain includes
all infinitesets as well, nothing would of course be affected in the results and the proofs even
if all infinite sets are included in the domain. Second, it is not really necessary that even
all finite sets be included in the domain. All the results and proofs would continue to hold
even if the domain includes all pairs and triples but not all finite sets.
(T.8). A choice function satisfies the Weak Congruence Axiom if and only if it satisfies
Properties a and P.
Proof By (T.3), WCA implies normality, which in turn implies a, by (T.5). Let P be
violated with x but not y belonging to C(T). But since x e S and y e C(S), we have yRx.
This is a violation of WCA. Thus WCA implies a and ,Bboth.
Now the converse. Let the antecedent of WCA hold, and for some S, x e S, y e C(S)
and xRy. By oc,y e C([x, y]). Since xRy, for some H, x E C(H) and y E H. By a,
x E C([x, y]). Thus [x, y] = C([x, y]). But then by ,B,y E C(S) if and only if x e C(S).
Since y is, in fact, in C(S), so must be x. Thus WCA must hold and it is shown that a and
,Btogether imply WCA.
A corollary to (T.8) is that a and ,Btogether imply all the conditions listed in (T.3) and
thus amount to complete rationality in the usual sense.
______________________________________ _ -
_i quasi-transitivity
transitivity
normal C(S)
R ~ ~ ~ RR7
Diagram
REFERENCES
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1 It may be observedthat Property8 can be apparentlyrelaxedto 8* to requirethat the statedcondition
should hold for all triples T and subsets S thereof, ratherthan for all finite sets S and T. From the proof
of (T. 10) it is seen that for a normalchoice function 8* is sufficientto guaranteequasi-transitivity,but then
by (T. 10) 8* guarantees8, and thus no real relaxationis involved.
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