Logit, CES, and rational inattention

Andrei Matveenko

Economics Letters, 2020, vol. 186, issue C

Abstract: We study the fundamental links between two popular approaches to consumer choice: the multinomial logit model of individual discrete choice and the CES utility function, which describes a diversified choice of a representative consumer. We base our analysis on the rational inattention (RI) model and show that the demand system of RI agents, each of which chooses a single option, coincides with the demand system of a fictitious representative agent with CES utility function. Thus, the diversified choice of the representative agent may be explained by the heterogeneity in signals received by the RI agents. We obtain a new interpretation for the elasticity of substitution and the weighting coefficients of the CES utility function. Specifically, we provide a correspondence between parameters of the CES utility function, prior knowledge and marginal cost of information.

Keywords: Discrete choice; Rational inattention; CES utility function; Multinomial logit; Representative consumer; Demand system (search for similar items in EconPapers)
JEL-codes: D40 D83 L11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Logit, CES, and Rational Inattention (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519302630

DOI: 10.1016/j.econlet.2019.108537

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