Discrete-Choice Models and Representative Consumer Theory

28 Pages Posted: 1 Apr 2022

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Marketing Science Institute (MSI)

Joonhwi Joo

University of Texas at Dallas - Naveen Jindal School of Management

Kyeongbae Kim

Sejong University - Department of Economics

Date Written: March 15, 2022

Abstract

We establish the Hurwicz-Uzawa integrability of the broad class of discrete-choice additive random-utility models of individual consumer behavior with perfect substitutes preferences and divisible goods. We derive the corresponding indirect uility function and then establish a representative consumer formulation for this entire class of models. The representative consumer is always normative, facilitating aggregate welfare analysis for this broad class of models. When products are indivisible, we show that integrability fails, indicating the lack of a representative consumer formulation.These findings should be of interest to the literatures in macro, trade, industrial organization, labor and ideal price index measurement that use representative consumer models, such as CES and its variants. Our results generalize such representative consumer formulations to the broad, empirically-relevant class of models of behavior that are routinely used in the discrete-choice analysis of micro data, including specifications that do not suffer from the IIA property and that allow for heterogeneous consumer preferences and incomes.

Keywords: discrete choice, representative consumer, integrability

Suggested Citation

Dube, Jean-Pierre H. and Joo, Joonhwi and Kim, Kyeongbae, Discrete-Choice Models and Representative Consumer Theory (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=4063183 or http://dx.doi.org/10.2139/ssrn.4063183

Jean-Pierre H. Dube

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://gsb.uchicago.edu/fac/jean-pierre.dube

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marketing Science Institute (MSI) ( email )

1000 Massachusetts Ave.
Cambridge, MA 02138-5396
United States

Joonhwi Joo (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX TX 75083-0688
United States
75080 (Fax)

Kyeongbae Kim

Sejong University - Department of Economics ( email )

143-743 Seoul
Korea, Republic of (South Korea)

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