A Kinky Consistency: Experimental Evidence of Behavior Under Linear and Non-Linear Budget Sets

Individuals face non-linear budget constraints in myriad situations. We test a fundamental assumption of economic analysis in such settings: that individuals display stable preferences when facing linear and non-linear incentives. We use a laboratory experiment to characterize how revealed preferences are affected by changes in the complexity of the budget set environment. We find that choices under kinked (piece-wise linear and convex) budgets exhibit a similar degree of rationality as choices under linear budgets — with very high levels of internally consistent behavior in each setting. However, for about half the subjects, individual choices across settings are inconsistent with the maximization of a stable preference. Relative to those who act consistently across settings, subjects displaying such arbitrary consistency exhibit large and significant changes in utility parameters, risk premiums, and price elasticities across settings. Finally, we show that subjects with initially more sophisticated decision rules are most susceptible to changes in complexity.