Implications of Ignoring the Budget Constraint in Menu-Based Choice
(A2020-64073)

AUTHORS

Tetyana Kosyakova, Frankfurt School of Finance & Management; Thomas Otter, Goethe University

KEYWORDS

budget-constraint; menu-based-choice; hierarchical-Bayes

ABSTRACT

Ignoring the budget constraint is the standard practice in discrete choice models, since the income effect drops out due to the quasi-linear specification of the utility function. In the framework of the menu-based choice though, choice of more than just one item from a menu is possible. Assuming that individuals can afford every possible combination of offers from a menu of size K, including the one comprised of all K offers, might not be reasonable. In this project, we incorporate the budget constraint into the menu choice model, proposed for the analysis of the data based on choices from a menu by Kosyakova et al. (2019), and demonstrate the implications of ignoring it.