Limits on Individual Choice

Eytan Sheshinski

MPRA Paper from University Library of Munich, Germany

Abstract: Individuals behave with choice probabilities defined by a multinomial logit (MNL) probability distribution over a finite number of alternatives which includes utilities as parameters. The salient feature of the model is that probabilities depend on the choice-set, or domain. Expanding the choice-set decreases the probabilities of alternatives included in the original set, providing positive probabilities to the added alternatives. The wider probability 'spread' causes some individuals to further deviate from their higher valued alternatives, while others find the added alternatives highly valuable. For a population with diverse preferences, there exists a subset of alternatives, called the optimum choice-set, which balances these considerations to maximize social welfare. The paper analyses the dependence of the optimum choice-set on a parameter which specifies the precision of individuals' choice ('degree of rationality'). It is proved that for high values of this parameter the optimum choice-set includes all alternatives, while for low values it is a singleton. Numerical examples demonstrate that for intermediate values, the size and possible nesting of the optimum choice-sets is complex. Governments have various means (defaults, tax/subsidy) to directly affect choice probabilities. This is modelled by 'probability weight' parameters. The paper analyses the structure of the optimum weights, focusing on the possible exclusion of alternatives. A binary example explores the level of 'type one' and 'type two' errors which justify the imposition of early eligibility for retirement benefits, common to social security systems. Finally, the effects of heterogeneous degrees of rationality among individuals are briefly discussed.

Keywords: Multinomial Logit; choice-set; default options; early eligibility constraint (search for similar items in EconPapers)
JEL-codes: H0 (search for similar items in EconPapers)
Date: 2010-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/53062/1/MPRA_paper_53062.pdf original version (application/pdf)

Related works:
Working Paper: Limits on Individual Choice (2010)
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:pra:mprapa:53062

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().