Prices versus Preferences: Taste Change and Revealed Preference

A systematic method for incorporating taste variation into a revealed preference framework for heterogeneous consumers is developed. We create a methodology that enables the recovery of the minimal variation in tastes that are required to rationalise the observed choice patterns. This approach is used to examine the extent to which changes in tobacco consumption have been driven by price changes or by taste changes, and whether the signi…cance of these two channels varies across socioeconomic groups. A censored quantile approach is used to allow for unobserved heterogeneity and censoring of consumption. Statistically signi…cant educational di¤erences in the marginal willingness to pay for tobacco are recovered. More highly educated cohorts are found to have experienced a greater shift in their e¤ective tastes away from tobacco. We would like to thank Laurens Cherchye, Dennis Kristensen, Arthur Lewbel and participants at the June 2014 CAM and November 2014 cemmap workshops for helpful comments. The authors also gratefully acknowledge …nancial support from the Economic and Social Research Council Centre for the Microeconomic Analysis of Public Policy at IFS and the European Research Council grant MicroConLab. All errors are ours.