Stochastic Dominance and Uncertain Price Prospects
E. Kwan Choi, Stanley R. Johnson
September 1988 [88-WP 31]
Choi, E.K. and S.R. Johnson. 1988. "Stochastic Dominance and Uncertain Price Prospects." Working paper 88-WP 31. Center for Agricultural and Rural Development, Iowa State University.
This paper develops rules for ordering uncertain price prospects. For consumers with identical ordinal preferences, we propose stochastic dominance rules based on equivalent variation (EV). The second-degree stochastic dominance (SSD) rule on the induced distributions of EV yields a unanimous ranking among income risk averters. The SSD rule on consumer surplus or compensating variation provides a valid ranking for income risk averters if the income elasticity of demand is zero. Risk averse consumers with different ordinal preferences cannot have a unanimous ranking of price prospects. We delineate two classes of risk averse consumers that have opposing rankings of price prospects with the same mean.