Behavioral Foundations of Nested Stochastic Choice and Nested Logit
36 Pages Posted: 17 Aug 2019
Date Written: August 5, 2019
We introduce a stochastic choice model, Nested Stochastic Choice (NSC), which generalizes nested logit. NSC features a “two-step” Luce procedure: a nest (subset) is chosen by one Luce formula and an alternative is chosen from that nest by another Luce formula. We characterize NSC with a single axiom, Independence of Symmetric Alternatives, which relaxes Luce’s IIA based on revealed similarity. We identify a key behavioral feature of nested logit — nest probability is increasing in the sum of utilities — and characterize nested logit and the Extended Nested Logit (ENL): nested logit without functional form assumptions.
Keywords: Nested Stochastic Choice, Luce Model, Nested Logit, IIA, Similarity Effect, Regularity, Revealed Similarity
JEL Classification: D01, D81, D9
Suggested Citation: Suggested Citation