Discrete Choice and Rational Inattention: A General Equivalence Result
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Discrete Choice and Rational Inattention : A General Equivalence Result. / Fosgerau, Mogens; Melo, Emerson; de Palma, André; Shum, Matthew.
2017.Research output: Working paper › Research
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TY - UNPB
T1 - Discrete Choice and Rational Inattention
T2 - A General Equivalence Result
AU - Fosgerau, Mogens
AU - Melo, Emerson
AU - de Palma, André
AU - Shum, Matthew
PY - 2017
Y1 - 2017
N2 - This paper establishes a general equivalence between discrete choice and rational inattention models. Matejka and McKay (2015, AER) showed that when information costs are modelled using the Shannon entropy, the result- ing choice probabilities in the rational inattention model take the multinomial logit form. We show that when information costs are modelled using a class of generalized entropies, then the choice probabilities in any rational inattention model are observationally equivalent to some additive random utility discrete choice model and vice versa. This equivalence arises from convex- analytic properties of the random utility model. Thus any additive random utility model can be given an interpretation in terms of boundedly rational behavior. We provide examples of this equivalence utilizing the nested logit model, an empirically relevant random utility model allowing for flexible substitution possibilities between choices.
AB - This paper establishes a general equivalence between discrete choice and rational inattention models. Matejka and McKay (2015, AER) showed that when information costs are modelled using the Shannon entropy, the result- ing choice probabilities in the rational inattention model take the multinomial logit form. We show that when information costs are modelled using a class of generalized entropies, then the choice probabilities in any rational inattention model are observationally equivalent to some additive random utility discrete choice model and vice versa. This equivalence arises from convex- analytic properties of the random utility model. Thus any additive random utility model can be given an interpretation in terms of boundedly rational behavior. We provide examples of this equivalence utilizing the nested logit model, an empirically relevant random utility model allowing for flexible substitution possibilities between choices.
KW - Faculty of Social Sciences
KW - Rational Inattention
KW - Discrete Choice
KW - Random Utility
KW - General Entropy
KW - Convex Analysis
KW - D03
KW - C25
KW - D81
KW - E03
M3 - Working paper
T3 - University of Copenhagen. Institute of Economics. Discussion Papers (Online)
BT - Discrete Choice and Rational Inattention
ER -
ID: 190436266