Profit-Aligned CATE Estimation: Reconciling Policy Learning and Inference

TL;DR

This paper introduces a profit-aligned CATE estimation framework that focuses on the decision boundary to improve profit maximization, unifying various policy optimization methods.

Contribution

It presents a novel objective function for CATE estimation aligned with profit, unifying standard plug-in and direct policy optimization approaches.

Findings

The framework is Fisher consistent with respect to profit.

It recovers consistent CATE estimates from profit-maximization pipelines.

Synthetic data demonstrates improved trade-off management between accuracy and profit.

Abstract

We propose a framework that aligns Conditional Average Treatment Effect (CATE) estimation with profit maximization. Our method recognizes that, for customers with extreme treatment effects, additional estimation accuracy is unlikely to change the recommended actions. In contrast, accuracy is critical near the decision boundary, where treatment effects are close to treatment costs. Our approach optimizes a novel objective function that concentrates learning capacity along this boundary. The proposed objective is Fisher consistent with respect to the original profit function and yields a consistent estimator for CATEs. Theoretically, our framework unifies standard plug-in optimization and direct policy optimization as limiting cases of the same optimization problem. We further show that entropy-regularized policy optimization is a special case of our framework. This result has a direct practical implication: firms can recover consistent CATE estimates from existing profit-maximization pipelines. We use synthetic data to demonstrate how the proposed framework allows firms to explicitly navigate the trade-off between global prediction accuracy and profit maximization.