GARP and SARP assumed mononticity?

Question

Monotonicity means the decision maker prefer more goods than less. It is not mentioned in textbook that SARP and GARP preasumed monotonicity, implicitly.

GARP: if $a$ is indirectly revealed preferred to $b$, then $b$ is not directly revealed strictly preferred to $a$.

SARP: if $a$ is indirectly revealed preferred to $b$, and $a\neq b$, then $b$ is not indirectly revealed preferred to $a$.

Because $aRb$ (directly revealed) means $ap_a\geq bp_a$ and $aR_sb$ (directly revealed strictly) means $ap_a>bp_a$, does that implies monotonicty if we assume the price is positive?

Answer 1

Strict monotonicity of the (internal) utility function is not assumed but is implied by GARP thanks to Afriat's theorem

GARP is equivalent to:

There exists a continuous, strictly increasing, and concave utility function which rationalizes the data

The equivalence does not hold for SARP. SARP implies GARP, but not vice-versa.

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Recall the actual definitions:

• Directly revealed weak preference; $x^a \ge^R x^b \; \text{if} \;p^ax^b \le w^a$
• Indirectly revealed strict preference: $$ x^a >^I x^b\; \text{if } \; \exists x^{i_1}, x^{i_2}, \ldots, x^{i_m} \; \text{such that} \; x^a \ge^R x^{i_1}, x^{i_1} \ge^R x^{i_2}, \ldots , x^{i_m} \ge^R x^b \\ \text{with at least one of these inequalities strict}$$

• GARP: if $x^a \ge^R x^b$, then not $x^b >^I x^a$

• an (internal) utility function $u:\mathbb{R}^n_+\to \mathbb{R}$ rationalizes the data $\{x^i, p^i, w^i\}_{i=1}^n$ if

$$ \forall x \in \mathbb{R}^n_+, \; p^ix \le w^i\; \text{implies}\; u(x^i) \ge u(x).$$

So you can argue just "by inspection" that GARP is a "sham" set up just so we get a strict (internal) utility that rationalizes the data. (Why else ask for one of those inequalities to be strict? It's actually a key to the proof.) Apparently, the GARP axiom was formulated by Afriat himself, although he called it "cyclical consistency", so... draw your own conclusions how he may have come up with GARP.

The selling point of Afriat's result, as I understand it, is that you can check the "rational expectation" that the agent is utility maximizing (making optimal choices) by merely looking at a sample of its choices (i.e. testing this sample for GARP); furthermore, if the test is positive, you can also derive an utility function that is "as good as" the one that presumably generated the choices. There's an issue that the method is not robust to measurement error though.

The revealed preference principle of Samuelson … elaborated by Houthakker … easily gives a condition for the rejection of the hypothesis of existence. But the principle has been absent by which the hypothesis can be accepted or rejected on the basis of observed choice of the consumer, supposed to be finite in number; and, in the case of acceptance, a general method is needed for the actual construction of a utility function which will realize the hypothesis for the data. (Afriat, 1967, 68)

<p>Afriat’s approach … was truly constructive, offering an explicit algorithm to calculate a utility function consistent with the finite amount of data, whereas the other arguments were just existence proofs. This makes Afriat’s approach much more suitable as a basis of empirical analysis. Afriat’s approach was so novel that most researchers at the time did not recognize its value. (Varian, 2006, 101)</p>

[...] Houthakker had proven that if demand functions satisfied SARP there would always exist a rationalizing utility function, but provided no practical way to find it, while GARP techniques provided a way to construct such a utility function.