Axiomatization of Random Utility Model with Unobservable Alternatives

Abstract: The random utility model is one of the most fundamental models in economics. Falmagne (1978) provides an axiomatization but his axioms can be applied only when choice frequencies of all alternatives from all subsets are observable. In reality, however, it is often the case that we do not observe choice frequencies of some alternatives. For such a dataset, we obtain a finite system of linear inequalities that is necessary and sufficient for the dataset to be rationalized by a random utility model. Moreover, the necessary and sufficient condition is tight in the sense that none of the inequalities is implied by the other inequalities, and dropping any one of the inequalities makes the condition not sufficient.