Just-noticeable difference as a behavioural foundation of the critical cost-efficiency

Working paper

Critical cost-efficiency index (or CCEI), proposed in Afriat (1972, 1973) and Varian (1990), is the most commonly used measure of revealed preference violations. By representing consumer preference with interval orders, as in Fishburn (1970), we show that this index is equivalent to a particular notion of the just-noticeable difference, i.e., a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, CCEI can be interpreted as the consumer's cognitive inability to discriminate among options. This characterisation sheds new light on the existing empirical findings.

Authors: Dziewulski, P

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2018-04-05
• Paper number: 848
• Keywords: interval order; utility maximisation; critical cost-efficiency index; generalised axiom of revealed preference; just-noticeable difference