WHEN CONSENSUS CHOICE DOMINATES INDIVIDUALISM: Jensen's Inequality and Collective Decisions under Uncertainty
AbstractResearch on collective provision of private goods has focused on distributional considerations. This paper studies a class of problems of decision under uncertainty in which the argument for collective choice emerges from the mathematics of aggregating individual payoffs. Consider decision making when each member of a population has the same objective function, which depends on an unknown state of nature. If agents knew the state of nature, they would make the same decision. However, they may have different beliefs or may use different decision criteria. Hence, they may choose different actions even though they share the same objective. Let the set of feasible actions be convex and the objective function be concave in actions, for all states of nature. Then Jensen's inequality implies that consensus choice of the mean privately-chosen action yields a larger aggregate payoff than does individualistic decision making, in all states of nature. If payoffs are transferable, the aggregate payoff from consensus choice may be allocated to Pareto dominate individualistic decision making, in all states of nature. I develop these ideas. I also use Jensen's inequality to show that a planner with the power to assign actions to the members of the population should not diversify. Finally, I give a version of the collective choice result that holds with consensus choice of the median rather than mean action.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15172.
Date of creation: Jul 2009
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Other versions of this item:
- Charles F. Manski, 2010. "When consensus choice dominates individualism: Jensen's inequality and collective decisions under uncertainty," Quantitative Economics, Econometric Society, vol. 1(1), pages 187-202, 07.
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-07-28 (All new papers)
- NEP-CDM-2009-07-28 (Collective Decision-Making)
- NEP-DCM-2009-07-28 (Discrete Choice Models)
- NEP-GTH-2009-07-28 (Game Theory)
- NEP-HPE-2009-07-28 (History & Philosophy of Economics)
- NEP-UPT-2009-07-28 (Utility Models & Prospect Theory)
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