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Behavioral Foundations of Nested Stochastic Choice and Nested Logit

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  • Matthew Kovach
  • Gerelt Tserenjigmid

Abstract

We provide the first behavioral characterization of nested logit, a foundational and widely applied discrete-choice model, through the introduction of a nonparametric version of nested logit that we call “nested stochastic choice” (NSC). NSC is characterized by a single axiom that weakens independence of irrelevant alternatives on the basis of revealed similarity to allow for the similarity effect. Nested logit is characterized by an additional menu-independence axiom. Our axiomatic characterization leads to a practical, data-driven algorithm that identifies the true nest structure from choice data. We also discuss limitations of generalizing nested logit by studying the testable implications of cross-nested logit.

Suggested Citation

  • Matthew Kovach & Gerelt Tserenjigmid, 2022. "Behavioral Foundations of Nested Stochastic Choice and Nested Logit," Journal of Political Economy, University of Chicago Press, vol. 130(9), pages 2411-2461.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/720399
    DOI: 10.1086/720399
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    Cited by:

    1. Yaron Azrieli & John Rehbeck, 2022. "Marginal stochastic choice," Papers 2208.08492, arXiv.org.
    2. Faro, José Heleno, 2023. "The Luce model with replicas," Journal of Economic Theory, Elsevier, vol. 208(C).

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