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Random Utility with Aggregation

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Listed:
  • Yuexin Liao
  • Kota Saito
  • Alec Sandroni

Abstract

We study random utility (RU) rationality with aggregation when the underlying alternatives in each aggregate vary across consumers and are unobserved, as is typical for an outside option. RUM over the underlying alternatives is the natural assumption on the data generating process, while an aggregated random utility model (ARUM) is the standard empirical tool. We characterize RU rationality in three frameworks and show its testable implications are substantially weaker than those of an ARUM. We provide two independent conditions for their equivalence: non-overlapping preferences within aggregates and menu-independent aggregation. Simulations show that violating either condition produces meaningful estimation bias when imposing an ARUM.

Suggested Citation

  • Yuexin Liao & Kota Saito & Alec Sandroni, 2025. "Random Utility with Aggregation," Papers 2506.00372, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2506.00372
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    References listed on IDEAS

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    2. Kreps, David M, 1979. "A Representation Theorem for "Preference for Flexibility"," Econometrica, Econometric Society, vol. 47(3), pages 565-577, May.
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