Logit, CES, and Rational Inattention
Research output: Working paper › Research
We study 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 multiple 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 multiple 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 coeficients of the CES utility function. Specifically, we provide a correspondence between parameters of the CES utility function, prior knowledge and marginal cost of information.
|Number of pages||22|
|Publication status||Published - 22 Jun 2017|
|Series||RePEc (Research Papers in Economics)|
- Faculty of Social Sciences - discrete choice, rational inattention, CES utility function, multinomial logit, representative consumer, demand system