A Kinky Consistency: Experimental Evidence of Behavior Under Linear and Non-Linear Budget Sets

Presented by Dr Emiliano Huet-Vaughn, University of California LA, with Juan Carlos Suarez Serrato.

Abstract

Individuals face non-linear incentives in myriad situations. This paper reports the results of a laboratory experiment designed to analyze individual choice under both linear and non-linear budget sets, the later characterized by piece-wise linear and convex (kinked) budget sets. We find that choice data under kinked budgets follows similar patterns of rationality as data under linear budgets, with high levels of internally consistent behavior, and, yet, choices across settings are not consistent with a common decision rule. Half of subjects display such arbitrary coherence, and, in turn, exhibit significantly lower price-responsiveness when facing the non-linear incentives. The findings yield new implications for welfare analysis and suggest caution is warranted in applying behavioral elasticity estimates derived from linear settings to non-linear settings (and vice versa).

About the presenter’s visit

Dr Emiliano Huet-Vaughn from the University of California (LA) will be visiting the School of Economics from 3-5 April.  While here he will be using room 503A Colin Clark Building.  If you would like to meet with him or have lunch or dinner with him please contact Dr Vera te Velde who will be his host while at The University of Queensland.  Dr te Velde can be contact on v.tevelde@uq.edu.au.