Logit, CES, and rational inattention

0524646 - NHÚ 2021 RIV NL eng J - Journal Article
Matveenko, Andrei
Logit, CES, and rational inattention.
Economics Letters. Roč. 186, January (2020), č. článku 108537. ISSN 0165-1765. E-ISSN 1873-7374
EU Projects: European Commission(XE) 678081 - INATTENTION
Institutional support: RVO:67985998
Keywords : discrete choice * rational inattention * CES utility function
OECD category: Economic Theory
Impact factor: 2.097, year: 2020
Method of publishing: Open access
https://doi.org/10.1016/j.econlet.2019.108537

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.
Permanent Link: http://hdl.handle.net/11104/0308984