The Kaldor compensation test and rational choice

It is well-known that the Kaldor compensation test can be inconsistent in the sense that it leads to contradictory or cyclical recommendations in some situations. This paper shows that there is a close relationship between the consistency of this test and the rationalizability of choices from given utility possibilities sets. This observation suggests that if the Kaldor test is consistent, social decisions can be made using a social welfare ordering in the first place. Therefore, the information assumptions embodied in some social welfare ordering have to be accepted if the Kaldor test is to be applied consistently.