nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2012‒05‒08
three papers chosen by
Philip Yu
Hong Kong University

  1. Envelope theorems for non-smooth and non-concave optimization By Andrew Clausen; Carlo Strub
  2. Are small groups Expected Utility? By Andrea Morone; Piergiuseppe Morone
  3. Biased Recommendations By Wonsuk Chung; Rick Harbaugh

  1. By: Andrew Clausen; Carlo Strub
    Abstract: We study general dynamic programming problems with continuous and discrete choices and general constraints. The value functions may have kinks arising (1) at indifference points between discrete choices and (2) at constraint boundaries. Nevertheless, we establish a general envelope theorem: first-order conditions are necessary at interior optimal choices. We only assume differentiability of the utility function with respect to the continuous choices. The continuous choice may be from any Banach space and the discrete choice from any non-empty set.
    Keywords: Envelope theorem, differentiability, dynamic programming, discrete choice, non-smooth analysis
    JEL: C61 E20
    Date: 2012–04
  2. By: Andrea Morone (Department of Economics, Universitat Jaume I; Department of Economics, University of Bari); Piergiuseppe Morone (Department of Economics, Universitat Jaume I; Department of Economics, University of Foggia)
    Abstract: In this paper we analyse the empirical performance of several preference functionals using individual and group data. Our investigation aims to address two fundamental questions that have, until now, not been addressed in literature. Specifically, we intend to assess if there exists a risky choice theory that statistically fits group decisions significantly better than alternative theories, and if there are significant differences between individual and group choices. Experimental findings reported in this paper provide answers to both questions showing that when risky choices are undertaken by small groups (dyads in our case), disappointment aversion outperforms several alternative preference functionals, including expected utility. Since expected utility typically emerged as the dominant model in individual risky choices, this finding suggests that differences between individual and group choices exist, showing that the preference aggregation process drives out EU.
    Keywords: group decision, expected utility, risk and uncertainty.
    JEL: C91 C92 D81 D70
    Date: 2012
  3. By: Wonsuk Chung (Department of Economics, Indiana University); Rick Harbaugh (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Consumers, investors, and other decision makers often rely on an expert to help choose among different alternatives that may also benefit the expert. Following recent theoretical research, we develop and experimentally test a simple discrete choice model of an expert who recommends one of two actions to a decision maker who also has the option to take neither action. Several phenomena identified in the literature on recommendations through costless, unverifiable cheap talk are captured together in this model. First, communication is "persuasive" in that recommending an action is credible and benefits the expert by reducing the chance that the decision maker takes neither action. Second, if the expert's incentives are biased toward an action then a recommendation for it is "discounted" and is less persuasive than a recommendation for the other action. Third, lack of "transparency" about expert incentives increases the gains to lying by biased experts, and also encourages experts with unbiased incentives to lie in the opposite direction as biased experts so as to be more persuasive. Fourth, if the decision maker is more easily pushed toward an action due to prior beliefs then the expert "panders" to the decision maker by sometimes recommending it even when it is the worse action. These predictions are robust to the expert having a cost to lying drawn from an arbitrary distribution. Experimental tests conducted with business students find that subject behavior is consistent with these predictions.
    Keywords: cheap talk, discrete choice, deception, persuasion, discounting, transparency, pandering
    JEL: D82 L15 C72 D72
    Date: 2012–04

This nep-dcm issue is ©2012 by Philip Yu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.