Logit, CES, and Rational Inattention

21 Pages Posted: 4 Apr 2017

See all articles by Andrei Matveenko

Andrei Matveenko

University of Mannheim - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2017


We study fundamental links between two popular approaches to consumer choice: the multinomial logit model of individual discrete choice and the CES utility function, which describes a multiple choice of a representative consumer. We base our analysis on the rational inattention (RI) model and show that the demand system of RI agents, each of which chooses a single option, coincides with the demand system of a fictitious representative agent with CES utility function. Thus, the multiple choice of the representative agent may be explained by the heterogeneity in signals received by the RI agents. We obtain a new interpretation for the elasticity of substitution and the weighting coefficients of the CES utility function. Specifically, we provide a correspondence between parameters of the CES utility function, prior knowledge and marginal cost of information.

Keywords: discrete choice, rational inattention, CES utility function, multinomial logit, representative consumer, demand system

JEL Classification: D40, D83, L11

Suggested Citation

Matveenko, Andrei, Logit, CES, and Rational Inattention (April 3, 2017). Available at SSRN: https://ssrn.com/abstract=2945402 or http://dx.doi.org/10.2139/ssrn.2945402

Andrei Matveenko (Contact Author)

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim

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