From Discrete Choice to Endogenous Distributions: Selection and Heterogeneity

Sergey K. Nigai

No 12461, CESifo Working Paper Series from CESifo

Abstract: This paper develops a tractable framework in which heterogeneity, captured by the distribution of agent characteristics within an alternative (sector, location, or occupation), emerges endogenously in equilibrium through selection rather than being imposed exogenously. I show that widely used extreme-value and power-law distributions arise as conditional outcomes of payoff-based discrete choice with multivariate shocks. The framework delivers a one-to-one mapping between equilibrium allocation shares and within-alternative heterogeneity. Because distributions are equilibrium objects, they respond to counterfactual shocks, introducing adjustment margins absent from standard models and generating richer responses, as shown in applications to trade, economic geography, and occupational sorting.

Keywords: endogenous distributions; endogenous heterogeneity; international trade; fréchet distribution; dagum distribution; heavy-tailed distributions; economic geography; selection (search for similar items in EconPapers)
JEL-codes: C6 F10 F20 R12 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12461

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