Discrete-Choice Models and Representative Consumer Theory
28 Pages Posted: 1 Apr 2022
Date Written: March 15, 2022
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
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