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Working Paper No. 1327

Testing for Weak Separability and Utility Maximization with Incomplete Adjustment

Working Paper
Hjertstrand, Per, James L. Swofford and Gerald A. Whitney (2020). “Testing for Weak Separability and Utility Maximization with Incomplete Adjustment”. IFN Working Paper No. 1327. Stockholm: Research Institute of Industrial Economics (IFN).

Per Hjertstrand, James L. Swofford, Gerald A. Whitney

We develop models for weakly separable utility maximization with incomplete adjustment. By allowing for incomplete adjustment, these models account for the decision maker’s inability to instantaneously adjust to optimal allocations of demanded goods and assets. This is especially important when modelling preferences for durable goods and financial/monetary assets. We propose computationally attractive nonparametric revealed preference procedures to test the models using observed data on prices and quantities. An empirical application shows that it is important to account for incomplete adjustment in consumer demand models of durable consumption goods.