Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model
Individuals must often choose among discrete alternatives with imperfect informa- tion about their values. Before choosing, they may have an opportunity to study the options, but doing so is costly. This costly information acquisition creates new choices such as the number of and types of questions to ask. We model these situations using the rational inattention approach to information frictions. We nd that the decision maker's optimal strategy results in choosing probabilistically in line with a modi ed multinomial logit model. The modi cation arises because the decision maker's prior knowledge and attention allocation strategy a ect his evaluation of the alternatives. When the options are a priori homogeneous, the standard logit model emerges.
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|Date of creation:||Jan 2011|
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