Logit, CES, and Rational Inattention

Andrei Matveenko

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We study 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 multiple 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 multiple 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 coeficients 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: 2017-06
New Economics Papers: this item is included in nep-dcm, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.cerge-ei.cz/pdf/wp/Wp593.pdf (application/pdf)

Related works:
Journal Article: Logit, CES, and rational inattention (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp593

Access Statistics for this paper

More papers in CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Vasiljevova ().