REVEALED PREFERENCE ANALYSIS OFCHARACTERISTICS MODELS

Characteristics models have been found to be useful in many areas of economics. However,their empirical implementation tends to rely heavily on functional form assumptions. Inthis paper we develop a revealed preference approach to characteristics models. We derivethe necessary and sufficient empirical conditions under which data on the market behaviourof heterogeneous, price-taking consumers are nonparametrically consistent with the consumercharacteristics model. Where these conditions hold, we show how information may be recoveredon individual consumer’s marginal valuations of product attributes. In some cases marginalvaluations are point identified and in other cases we can only recover bounds. Where the conditionsfail we highlight the role which the introduction of unobserved product attributes canplay in rationalising the data. We implement these ideas using consumer panel data on theDanish milk market....