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New Approaches to Decision Problems

Paper Session

Sunday, Jan. 7, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Travis D
Hosted By: Econometric Society
  • Chair: Junnan HE, Sciences Po

Dominance and Optimality

Tilman Borgers
,
University of Michigan
Xienan Cheng
,
Peking University

Abstract

We introduce a theory of dominance among choices that encompasses strict and weak dominance among strategies in games, Blackwell dominance among experiments, and first or second-order stochastic dominance among monetary lotteries as special cases. One choice dominates another if in a variety of situations the former choice yields higher expected utility than the latter. We show that under certain assumptions all undominated choices are optimal in some situation. We show this result for three different definitions of dominance and optimality. Our analysis of existing dominance notions in economics in one common framework allows us to compare the properties of these concepts, and to obtain insights into why certain versions of our result apply only to some, but not all of these concepts. We motivate the concept of undominated strategies by developing a formal result relating undominated strategies to rational inattention.

Policy-Making for Small-Probability Catastrophes

Michael Mandler
,
University of London

Abstract

I consider policy-making in the face of two types of small-probability catastrophes: environmental events that can lead to very low consumption and extermination events (such as large meteor strikes) that cut short an indefinitely long flow of future utility. A robustness requirement that a policy ranking should not be overturned by a small change in the distributions of outcomes will block any ranking of policies. The maxmin criterion for multiple priors can get around this impasse. In the environment setting, maxmin policymakers should minimize the likelihood of the tail event of very low consumption while in the extermination setting they should ignore the tail event where civilization survives until the very distant future. The latter conclusion validates conventional policy comparisons based on discounting.

Random Choice and Differentiation

Junnan He
,
Sciences Po
Paulo Natenzon
,
Washington University-St. Louis

Abstract

Measuring product differentiation and substitutability is a key concern in the analysis of consumer demand. To facilitate its measurement, we develop a general yet tractable model of random choice in a multi-attribute setting. We show the analyst can separately identify vertical and horizontal differentiation from binary comparison data alone. We characterize the binary choice rules that arise from our model using four easily understood axioms. In multinomial choice, we show the intersection of our model with the classic random utility framework yields random coefficients with an elliptical distribution. We provide applications to consumer
demand and choice under risk.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty