Revealed preference and household production

The paper deals with the possibilities of recovering the underlying preference ordering from observed behavior when nonmarket goods are employed in household production. The problem is relevant for the evaluation of environmental goods and for the measurement of welfare in environmental policy. It is shown that preferences can be recovered if and only if a corresponding (mixed) demand system can be integrated. This system can be derived from observable behavior and the household production functions imposed. The conditions for its integrability are presented and can be checked. Therefore the approach suggested is operational and allows to decide whether the behavior observed and the household production functions chosen (as maintained hypothesis) are consistent. This result is important since the evaluation of nonmarket goods in this framework crucially depends on the choice of the household production functions.