American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model
American Economic Review
vol. 105,
no. 1, January 2015
(pp. 272–98)
Abstract
Individuals must often choose among discrete actions with imperfect information about their payoffs. Before choosing, they have an opportunity to study the payoffs, but doing so is costly. This creates new choices such as the number of and types of questions to ask. We model these situations using the rational inattention approach to information frictions. We find that the decision maker's optimal strategy results in choosing probabilistically in line with a generalized multinomial logit model, which depends both on the actions' true payoffs as well as on prior beliefs. (JEL D11, D81, D83)Citation
Matějka, Filip, and Alisdair McKay. 2015. "Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model." American Economic Review, 105 (1): 272–98. DOI: 10.1257/aer.20130047Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness