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 journalJournal articlepeer-review

Harvard

Matveenko, A 2020, 'Logit, CES, and rational inattention', Economics Letters, vol. 186, 108537. https://doi.org/10.1016/j.econlet.2019.108537

APA

Matveenko, A. (2020). Logit, CES, and rational inattention. Economics Letters, 186, [108537]. https://doi.org/10.1016/j.econlet.2019.108537

Vancouver

Matveenko A. Logit, CES, and rational inattention. Economics Letters. 2020 Jan;186. 108537. https://doi.org/10.1016/j.econlet.2019.108537

Author

Matveenko, Andrei. / Logit, CES, and rational inattention. In: Economics Letters. 2020 ; Vol. 186.

Bibtex

@article{7afa4a64c4a948e989c547f58dfb93da,
title = "Logit, CES, and rational inattention",
abstract = "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.",
keywords = "CES utility function, Demand system, Discrete choice, Multinomial logit, Rational inattention, Representative consumer",
author = "Andrei Matveenko",
year = "2020",
month = jan,
doi = "10.1016/j.econlet.2019.108537",
language = "English",
volume = "186",
journal = "Economics Letters",
issn = "0165-1765",
publisher = "Elsevier",

}

RIS

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