Logit, CES, and rational inattention
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Logit, CES, and rational inattention. / Matveenko, Andrei.
In: Economics Letters, Vol. 186, 108537, 01.2020.Research output: Contribution to journal › Journal article › peer-review
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TY - JOUR
T1 - Logit, CES, and rational inattention
AU - Matveenko, Andrei
PY - 2020/1
Y1 - 2020/1
N2 - We study the 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 diversified 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 diversified 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.
AB - We study the 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 diversified 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 diversified 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.
KW - CES utility function
KW - Demand system
KW - Discrete choice
KW - Multinomial logit
KW - Rational inattention
KW - Representative consumer
U2 - 10.1016/j.econlet.2019.108537
DO - 10.1016/j.econlet.2019.108537
M3 - Journal article
AN - SCOPUS:85071332863
VL - 186
JO - Economics Letters
JF - Economics Letters
SN - 0165-1765
M1 - 108537
ER -
ID: 255049340