Random Utility with Unobservable Alternatives

Haruki Kono, Kota Saito and Alec Sandroni

Papers from arXiv.org

Abstract: The random utility model, a cornerstone in economics, is axiomatized by Falmagne (1978) and McFadden and Richter (1990) with the assumption that if a menu is observable, the choice frequencies of all alternatives are also observable. However, in practice, it is common for choice frequencies of some alternatives to remain unobserved. To address this discrepancy, we obtain the testable implications of the random utility model when the choice frequencies of some alternatives are unobservable, which consist of nonredundant inequality constraints on observed choice frequencies. Our findings indicate that the widespread empirical practice of aggregating unobserved alternatives into a single "outside option" fails to capture significant implications of random utility models.

Date: 2023-02, Revised 2025-10
New Economics Papers: this item is included in nep-dcm, nep-ecm and nep-upt
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