This project uses mathematical techniques to develop a wide range of testable impliactions of important economic theories. The research team examines the theory of demand, matching, and the theory of group choice. The first part of the project analyzes the mathematical model of self-interested behavior by individual consumers to determine when data on actual consumption can show that goods are complements or substitutes. The theory of complements and substitutes is one of the oldest in economics, but the full range of ways to test this theory has not been developed up to now.
Group behavior also has testable implications. The economic theory of matching attempts to explain, for example, how employers and workers choose each other. Matching a job to an employee generates some resources for the employer and employee as a unit. In economic theory, the way these resources are generated has a very specific mathematical form, and the PIs are discovering how to test the theory using actual employement data.
The PIs are also examining the model of Pareto optimality. Again, this is one of the basic ideas in economics -- an economic outcome is Pareto optimal if there is no way to make anyone better off without making someone worse off. This the core idea used to measure whether an outcome is economically efficient, and it is widely used not just by researchers but by policy-makers. The PIs are developing ways to examine observed social choices to determine if they are Pareto optimal.
