Holger Gerhardt

Estimating Preferences from Strictly Concave Budget Restrictions

We propose an experimental method, Strictly Concave Budget Restrictions, to determine preference parameters precisely with the lowest possible number of observed choices. Our approach extends a method that is commonplace in economics for estimating preference parameters: the analysis of choices that were made subject to linear budget restrictions. Compared to other elicitation methods, budget-based approaches allow for relatively precise estimation of the preference parameters that govern individuals’ choices. This is the case, however, only as long as individuals choose interior allocations. It has turned out across numerous experimental studies that the majority of participants’ choices from linear budgets are corner allocations. The main idea of Strictly Concave Budget Restrictions is to encourage interior choices by making corner allocations extremely unattractive. In an online study investigating intertemporal choice, we demonstrate that our method indeed drastically reduces the frequency of corner allocations. Preliminary analyses indicate that our method also improves the ability to estimate parameters on the individual level and, as a consequence, to characterize interindividual heterogeneity.