Stochastic Dominance and Uncertain Price Prospects

Abstract

<p>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.</p>