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 -