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Discrete Choice and Rational Inattention: a General Equivalence Result

Author

Listed:
  • Mogens Fosgerau

    (Department of Economics, Copenhagen University)

  • Emerson Melo

    (Indiana University Bloomington)

  • André de Palma

    (Ecole Normale Superieure de Cachan (ENS))

  • Matthew Shum

    (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, 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.

Suggested Citation

  • Mogens Fosgerau & Emerson Melo & André de Palma & Matthew Shum, 2017. "Discrete Choice and Rational Inattention: a General Equivalence Result," Discussion Papers 17-26, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:1726
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    References listed on IDEAS

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    More about this item

    Keywords

    Rational Inattention; Discrete Choice; Random Utility; General Entropy; Convex Analysis;
    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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