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Optimization Under First Order Stochastic Dominance Constraints

Author

Listed:
  • Darinka Dentcheva

    (Stevens Institute of Technology)

  • Andrzej Ruszczynski

    (Rutgers University)

Abstract

We consider stochastic optimization problems involving stochastic dominance constraints of first order, also called stochastic ordering constraints. They are equivalent to a continuum of probabilistic constraints or chance constraints. We develop first order necessary and sufficient conditions of optimality for these models. We show that the Lagrange multipliers corresponding to stochastic dominance constraints are piecewise constant nondecreasing utility functions. These results extend our theory of stochastic dominance-constrained optimization to the first order case, in which the main challenge is the potential non- convexity of the problem. We also show that the convexification of stochastic ordering relation is equivalent to second order stochastic dominance under rather weak assumptions. This paper appeared as "Semi-Infinite Probabilistic Optimization: First Order Stochastic Dominance Constraints" in "Optimization" 53(2004) 583-- 601.

Suggested Citation

  • Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Optimization Under First Order Stochastic Dominance Constraints," GE, Growth, Math methods 0403002, University Library of Munich, Germany, revised 07 Aug 2005.
    • Handle: RePEc:wpa:wuwpge:0403002
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    References listed on IDEAS

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    1. Ronald E. Gangnon & William N. King, 2002. "Minimum distance estimation of the distribution functions of stochastically ordered random variables," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 51(4), pages 485-492, October.
    2. James P. Quirk & Rubin Saposnik, 1962. "Admissibility and Measurable Utility Functions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(2), pages 140-146.
    3. A. Charnes & W. W. Cooper & G. H. Symonds, 1958. "Cost Horizons and Certainty Equivalents: An Approach to Stochastic Programming of Heating Oil," Management Science, INFORMS, vol. 4(3), pages 235-263, April.
    4. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
    5. Darinka Dentcheva & Andrzej Ruszczynski, 2004. "Convexification of Stochastic Ordering," GE, Growth, Math methods 0402005, University Library of Munich, Germany, revised 05 Aug 2005.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Stochastic dominance; stochastic ordering; stochastic programming; utility functions; semi-infinite optimization; optimality conditions; convexification.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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