Discrete Choice and Rational Inattention: a General Equivalence Result

Fosgerau, Mogens and Melo, Emerson and Andre, De Palma and Shum, Matt (2017): Discrete Choice and Rational Inattention: a General Equivalence Result.

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. This includes models such as the probit and nested logit.

• Item Type: MPRA Paper
• Language: English
• Keywords: Rational inattention; discrete choice; random utility; convex analysis; generalized entropy
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities; D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; E - Macroeconomics and Monetary Economics > E0 - General > E03 - Behavioral Macroeconomics

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