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Discrete Choice and Rational Inattention: A General Equivalence Result

Author

Listed:
  • Mogens Fosgerau

    (DTU - Danmarks Tekniske Universitet = Technical University of Denmark)

  • Emerson Melo

    (Indiana University [Bloomington] - Indiana University System)

  • André de Palma

    (ENS Cachan - École normale supérieure - Cachan)

  • Matthew Shum

    (CALTECH - California Institute of Technology)

Abstract

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 function, the resulting choice probabilities in the rational inattention model take the multinomial logit form. By exploiting convex-analytic properties of the discrete choice model, we show that when information costs are modelled using a class of generalized entropy functions, the choice probabilities in any rational inattention model are observationally equivalent to some additive random utility discrete choice model and vice versa. Thus any additive random utility model can be given an interpretation in terms of boundedly rational behavior. This includes empirically relevant specifications such as the probit and nested logit models.

Suggested Citation

  • Mogens Fosgerau & Emerson Melo & André de Palma & Matthew Shum, 2017. "Discrete Choice and Rational Inattention: A General Equivalence Result," Working Papers hal-01501313, HAL.
    • Handle: RePEc:hal:wpaper:hal-01501313
    DOI: 10.2139/ssrn.2889048
    Note: View the original document on HAL open archive server: https://hal.science/hal-01501313
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    References listed on IDEAS

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    More about this item

    Keywords

    convex analysis; generalized entropy; rational inattention; discrete choice; random utility;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics

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