Strength in diversity? Fiscal federalism among the fifty US states

Authors: Teresa Garcia-Milà, Therese J. McGuire and Wallace E. Oates

International Tax and Public Finance, Vol. 25, No 4, 1071-1091, August, 2018

Suppose that, when evaluating two alternatives x and y by means of a parametric utility function, low values of the parameter indicate a preference for x and high values indicate a preference for y. We say that a stochastic choice model is monotone whenever the probability of choosing x is decreasing in the preference parameter. We show that the standard use of random utility models in the context of risk and time preferences may sharply violate this monotonicity property and argue that their use in preference estimation may be problematic. They may pose identification problems and could yield biased estimations. We then establish that the alternative random parameter models are always monotone.

This paper originally appeared as Barcelona GSE Working Paper 1001