Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model

CERGE-EI Working Paper Series No. 442

28 Pages Posted: 16 Jul 2011

See all articles by Filip Matějka

Filip Matějka

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Alisdair McKay

Boston University - Department of Economics

Date Written: June 1, 2011

Abstract

Often, individuals must choose among discrete alternatives with imperfect information about their values, such as selecting a job candidate, a vehicle or a university. 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 the job candidates. We model these situations using the tools of the rational inattention approach to information frictions (Sims, 2003). We find that the decision maker's optimal strategy results in choosing probabilistically exactly in line with the multinomial logit model. This provides a new interpretation for a workhorse model of discrete choice theory. We also study cases for which the multinomial logit is not applicable, in particular when two options are duplicates. In such cases, our model generates a generalization of the logit formula, which is free of the limitations of the standard logit.

Keywords: rational inattention, discrete choice, logit model

JEL Classification: D81, D83, D01

Suggested Citation

Matějka, Filip and McKay, Alisdair, Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model (June 1, 2011). CERGE-EI Working Paper Series No. 442, Available at SSRN: https://ssrn.com/abstract=1886964 or http://dx.doi.org/10.2139/ssrn.1886964

Filip Matějka (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Alisdair McKay

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/amckay

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