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Random Utility with Aggregated Alternatives

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  • Yuexin Liao
  • Kota Saito
  • Alec Sandroni

Abstract

This paper studies when discrete choice data involving aggregated alternatives such as categorical data or an outside option can be rationalized by a random utility model (RUM). Aggregation introduces ambiguity in composition: the underlying alternatives may differ across individuals and remain unobserved by the analyst. We characterize the observable implications of RUMs under such ambiguity and show that they are surprisingly weak, implying only monotonicity with respect to adding aggregated alternatives and standard RUM consistency on unaggregated menus. These are insufficient to justify the use of an aggregated RUM. We identify two sufficient conditions that restore full rationalizability: non-overlapping preferences and menu-independent aggregation. Simulations show that violations of these conditions generate estimation bias, highlighting the practical importance of how aggregated alternatives are defined.

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

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    1. Stafford, Tess M., 2018. "Accounting for outside options in discrete choice models: An application to commercial fishing effort," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 159-179.
    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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