Discrete Choice and Rational Inattention: a General Equivalence Result
Mogens Fosgerau (),
André de Palma () and
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Emerson Melo: Indiana University Bloomington
Matthew Shum: California Institute of Technology
No 17-26, Discussion Papers from University of Copenhagen. Department of Economics
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 resulting 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.
Keywords: Rational Inattention; Discrete Choice; Random Utility; General Entropy; Convex Analysis (search for similar items in EconPapers)
JEL-codes: D03 C25 D81 E03 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-ore, nep-tre and nep-upt
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Working Paper: Discrete Choice and Rational Inattention: a General Equivalence Result (2017)
Working Paper: Discrete Choice and Rational Inattention: A General Equivalence Result (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:1726
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