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A Simple Characterization of Stochastically Monotone Functions Author(s): James Bergin and Adam Brandenburger Source: Econometrica, Vol.

58, No. 5 (Sep., 1990), pp. 1241-1243 Published by: The Econometric Society Stable URL: http://www.jstor.org/stable/2938309 Accessed: 20/11/2010 12:56
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Econometnica, 58, No. 5 (September, Vol. 1990),1241-1243 A SIMPLE CHARACTERIZATION OF STOCHASTICALLY MONOTONE FUNCTIONS BERGIN ANDADAMBRANDENBURGER1 BY JAMES

McKELVEYAND PAGE (1986) proved a remarkable theorem on common RECENTLY, knowledge. Suppose n individuals start with a common prior and then form conditional probabilities of some event of interest based on their different information. If a stochastically monotone aggregate of the n conditional probabilities is common knowledge, then the assessments must be identical. In this note we show that the aggregation of individual assessments allowed for in the theorem admits an elementary characterization: a function is stochastically monotone if and only if it is additively separable into strictly increasing components. This result is used in Nielsen, Brandenburger, Geanakoplos, McKelvey, and Page (1990) to extend McKelvey and Page's theorem to conditional expectations and, at the same time, to provide a very simple and brief proof of the more general theorem. In order to state the result of this note, some preliminary definitions are needed.

Then ,u DEFINITION 1: Let A and v be probability measures on the Borel subsets of OR. stochastically dominates v if A((-oo,x]) < v((-o, x]) for every x e0R. If, moreover, ((- oo,x]) < v((- oo,x]) for some x, then ,u strictlystochastically dominates v.

let Given a probability measure ,u on the Borel subsets of R;8n, Ai, i = 1,... , n, denote the ith marginal of ,u. That is, for any Borel subset B of OR, p.i(B) = A({(xi,. . ., xn) E R8n: B}). xi E=

DEFINITION Let ,u and v be probability measures on the Borel subsets of RWn 2: . Then
,u stochastically dominates v if A.i stochastically dominates vi for every i = 1,..., n. If,

moreover, pi. strictly stochastically dominates vi for some i, then p. strictlystochastically dominates v.

DEFINITION A function f: wRn R is stochastically monotone if, given probability 3: -0 measures p. and v on the Borel subsets of R n for which ffdp. and ffdv exist and are finite, ffdp. > ff dv whenever p. strictly stochastically dominates v.

The result of this note can now be stated.

PROPOSITION: A fuinctionf: R8 nR is stochastically monotone if and only if it can be writtenin the form f (x) = En= lfi(xi) where each fi: R -0 R is strictlyincreasing. 1 Financial supportfromthe Harvard BusinessSchoolDivisionof Researchis gratefully acknowledged.

1241

1242

JAMES BERGIN AND ADAM BRANDENBURGER

and is The proof of sufficiency given in McKelvey Page (1986)and is repeatedhere for the sake of completeness.If f(x)= E1 1fi(xi) where each fi is strictlyincreasing,then ff(x) dA(x)
=

f E f,(xi)
i=1

dA(x)

i=l1
n =

Effi(xi) dAi(x)
Effi(x,)
dAi(xi)

i=l1
n

>

ff,(x,) dvi(xi) =f (x) dv(x)

whenever,u strictly stochasticallydominates v. Necessity is proved in the following sequenceof lemmas.


LEMMA 1:

in increasing each component. monotone,thenf is strictly Iff is stochastically

PROOF: Supposewithout loss of generalitythat f is not strictlyincreasingin its first with xl >Y1 such that and component.Then there is an x E wRn a Y1E OR
f (Xl, x2, . , Xn) '-:'f (Yl, X2, * * *, Xn) .

Construct ,u and v to satisfy ,A(x1, x2,...

x)

1 and v(yl, x2,..., xI)

dominatesv but strictlystochastically


A(XlIX2I

1. Then A

..

I Xn)

= ffdAl < ffdv, = f(ylI

x2,

*,Xn).

monotone. That is, f is not stochastically

Q.E.D.

In Lemma 3 we show that stochastic monotonicity implies additive separability. The proof will use the following condition for additive separability.
LEMMA2: The function f is additively separable if and only iffor every i = 1, ...
,

n and all

xi, Yi(= R, f(xi, of (xl, * X, xl,

* , x'_i, xi, xi+i, * , xn) -f(Xl,...,Xi_l,yi,Xi+l,..,


Xi+l, * * * SXn) (= Rtn-

Xn) is independent

PROOF:Necessity is immediate. To prove sufficiency, note that the independence hypothesis applied to i = 1 implies that
(1) f(x1,x2. * I Xn)

-f (?1 X2 .... Xn) =f (xl, O, . .,O-f )

(O, O,

*, )

Applying the independence hypothesis to i (2)


f(?'X2'

2 yields

X3 *** Xn)

f(O,O, X3 ** Xn) =f(O, X2 0 . IO) -f(O,?,,

* ,)-

Combining (1) and (2) gives


f (Xl I X2 SX3 S** Xn) = f (xi,

?, ?, . .

) + f (0 X21 0? .. ., ?)

STOCHASTICALLY

MONOTONE

FUNCTIONS

1243

Applyingthe independencehypothesisto i = 3,.. ., n - 1 successively, yields


f (Xl,..Xn) =f (Xi, 0, * -,O) +f (O X2, *S.lO) + .

+f(O,,0l. * X -(n-1)f(O. That is, f is additively separable.

... O). Q.E.D.

LEMMA If f is stochastically monotone, then it is additivelyseparable. 3: PROOF:If f is not additively separable, then by Lemma 2 there are x, y E R;8n such that, without loss of generality,
af(Xl
I X2 S**

Xn)

-f

(Yl I X21 ..*..* Xn)

>(Xl IY2,---YJ

- f(Yl IY2,---YJ-b.

Suppose, again without loss of generality, that x1 > Yi Then by Lemma 1, a > 0 and
b > 0. Construct ,u and v to satisfy
V(X1 I X2, * ,Xn) =
V(yi,

X2

**

Xn)

v(nle
A(Xi,

A
X2, ....* Xn)

= *c
4
=41 +a6,

Y2,. Ythat

( Y1I X21.. I Xn)

Yn) k(X1, Y2, **,A(Y1, Y2, .. *,Yn)

41+ El 41 -E

where 0 < < 4 and O< e < 4. Notice that if 5 < e, then ,u strictly stochastically dominates v. A simple calculation shows that ffd,u -ffdv = eb -8a Hence choosing be/a < 8 <e shows that f is not Q.E.D.

which is less than 0 if 8 > be/a. stochastically monotone.

Lemmas 1 and 3 establish the Proposition. Department of Economics, Queen's University,Kingston, Canada K7L 3N6 and Harvard Business School, Boston, M4 02163, U. S. A.
ManuscriptreceivedAugust, 1989; final revision received September,1989. REFERENCES R., AND T. PAGE (1986): "Common Knowledge, Consensus, and Aggregate Information," Econometrica, 54, 109-127. L. T., A. BRANDENBURGER, NIELSEN, J. GEANAKOPLOS, R. MCKELVEY, AND T. PAGE (1990): "Common Knowledge of an Aggregate of Expectations," Econometrica, 58, 1235-1239.
MCKELVEY,