Additive Random Utility Models (ARUMs)


 


Introduction

Some notation If agent $x$ and agent $y$ match, they receive utilities $$U_{xy} + \varepsilon_{y} \ \text{ and } \ V_{xy} + \eta_{x}$$ respectively, where

Choice Problem

For agent of type $x$, the random utility of alternative $y$ is given by $U_{xy} + \varepsilon_y$, where $\varepsilon \sim \mathbf{P}_x$ and $U_{x0} = 0$, hence agent $x$ solves $$ \max_{y \in \mathcal{Y}} \left\{ U_{xy} + \varepsilon_y, \varepsilon_0 \right\} $$ Similarly, for an agent of type $y$, the random utility of alternative $x$ is given by $V_{xy} + \eta_x$, where $\eta \sim \mathbf{Q}_y$ and $V_{0y} = 0$, hence agent $y$ solves $$ \max_{x \in \mathcal{X}} \left\{ V_{xy} + \eta_x, \eta_0 \right\} $$

Indirect Utility

$G$ is the indirect utility, or $Emax$ operator: $$ G(U) = \sum_{x \in \mathcal{X}} n_x \mathbb{E}_{\mathbf{P}_x} \left[ \max_{y \in \mathcal{Y}} \left\{ U_{xy} + \varepsilon_y, \varepsilon_0 \right\} \right] $$ with corresponding operator for $y$: $$ H(U) = \sum_{y \in \mathcal{Y}} m_y \mathbb{E}_{\mathbf{Q}_y} \left[ \max_{x \in \mathcal{X}} \left\{ V_{xy} + \eta_x, \eta_0 \right\} \right] $$ By the Williams-Daly-Zachary theorem, the number of agents of type $x$ choosing agents of type $y$ is given by $$ \mu_{xy} = \frac{\partial G(U)}{\partial U_{xy}} $$ or $$ \mu_{xy} = \frac{\partial H(U)}{\partial V_{xy}} $$

Legendre Transform

If $\mathbf{P}_x$ has a nonvanishing density, the relation between $U$ and $\mu$ is invertible, and one has $$ \mu_{xy} = \frac{\partial G(U)}{\partial U_{xy}} \ \text{ if, and only if, } \ U_{xy} = \frac{\partial G^*(\mu)}{\partial \mu_{xy}} $$ where $G^*$ is the Legendre transform: $$ G^*(\mu) = \max_{U} \left\{ \sum_{xy} \mu_{xy} U_{xy} - G(U) \right\} $$ Similarly, $$ \mu_{xy} = \frac{\partial H(V)}{\partial V_{xy}} \ \text{ if, and only if, } \ V_{xy} = \frac{\partial H^*(\mu)}{\partial \mu_{xy}} $$ where $$ H^*(\mu) = \max_{V} \left\{ \sum_{xy} \mu_{xy} V_{xy} - H(V) \right\} $$