Behavioral Foundations of Nested Stochastic Choice and Nested Logit

Matthew Kovach and Gerelt Tserenjigmid (gtserenj@ucsc.edu)

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Abstract: We provide the first behavioral characterization of nested logit, a foundational and widely applied discrete choice model, through the introduction of a non-parametric version of nested logit that we call Nested Stochastic Choice (NSC). NSC is characterized by a single axiom that weakens Independence of Irrelevant Alternatives based on revealed similarity to allow for the similarity effect. Nested logit is characterized by an additional menu-independence axiom. Our axiomatic characterization leads to a practical, data-driven algorithm that identifies the true nest structure from choice data. We also discuss limitations of generalizing nested logit by studying the testable implications of cross-nested logit.

Date: 2021-12, Revised 2022-02
New Economics Papers: this item is included in nep-dcm, nep-ecm and nep-upt
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Citations: View citations in EconPapers (3)

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Journal Article: Behavioral Foundations of Nested Stochastic Choice and Nested Logit (2022)
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