Discrete Choice and Rational Inattention: A General Equivalence Result
32 Pages Posted: 23 Dec 2016 Last revised: 6 Mar 2019
Date Written: December 5, 2017
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 choice probabilities in the rational inattention model take the multinomial logit form. Generalizing from this, we show that when information costs are modelled using a class of generalized entropies, then the choice probabilities are observationally equivalent to some additive random utility discrete choice model and vice versa. Despite this equivalence, the class of generalized rational inattention models we develop permits groups of options to be complements, which is explicitly ruled out in discrete choice models. We illustrate our results utilizing the nested logit, an empirically relevant discrete choice model.
Keywords: Rational Inattention; discrete choice models; random utility; complements; convex analysis; generalized entropy
JEL Classification: D03, C25, D81, E03
Suggested Citation: Suggested Citation