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American Economic Review Vol. 105 No. 1 2015

Rational Inattention to Discrete Choices: A New Foundation for the Multinomial Logit Model

Filip Matějka1; Alisdair McKay2

1 CERGE-EI, Politických ve ˇ zn ˇ u ˚ 7, Praha 1, 150 00, the Czech Republic, a joint workplace of Charles University in Prague and the Economics Institute of the Academy of Sciences of the Czech Republic (e-mail: ) · 2 Department of Economics, Boston University, 270 Bay State Road, Boston, Massachusetts (e-mail: ).

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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.

DOI
10.1257/aer.20130047
Volume
105
Issue
1
Pages
272-298
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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