American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Random Utility with Unobservable Alternatives
American Economic Review
(pp. 2850–82)
Abstract
The random utility model (RUM), a cornerstone in economics, is typically studied under the assumption that choice frequencies of all alternatives are observable. In practice, however, some alternatives have unobservable choice frequencies and are commonly aggregated into a single category called an outside option. We study RUM in such environments and derive a finite, nonredundant system of inequality constraints on observed choice frequencies that characterizes RU-rationalizability. We show that the conventional practice of aggregating unobserved alternatives can miss key information leading to incorrect conclusions such as that observed choices are rationalizable, even when no RUM is consistent with them.Citation
Kono, Haruki, Kota Saito, and Alec Sandroni. 2026. "Random Utility with Unobservable Alternatives." American Economic Review 116 (8): 2850–82. DOI: 10.1257/aer.20240712Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D44 Auctions
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness