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Invariance of the distribution of the maximum

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  • Fosgerau, Mogens
  • Lindberg, Per Olov
  • Mattsson, Lars-Göran
  • Weibull, Jörgen

Abstract

Many models in economics involve probabilistic choices where each decision-maker selects the best alternative from a finite set. Viewing the value of each alternative as a random variable, the analyst is then interested in the choice probabilities, that is, the probability for an alternative to give the maximum value. Much analytical power can be gained, both for positive and normative analysis, if the maximum value is statistically independent of which alternative obtains the highest value. This note synthesizes and generalizes previous results on this invariance property. We provide characterizations of the property within a wide class of distributions that comprises the McFadden GEV class, show implications in several directions, and establish connections with copulas. We illustrate the usefulness of the invariance property by way of a few examples.

Suggested Citation

  • Fosgerau, Mogens & Lindberg, Per Olov & Mattsson, Lars-Göran & Weibull, Jörgen, 2015. "Invariance of the distribution of the maximum," MPRA Paper 63538, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:63538
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    References listed on IDEAS

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    More about this item

    Keywords

    Choice; random utility; extreme value; leader-maximum; invariance; independence;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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