Identification of a rational inattention discrete choice model

Abstract

This paper studies the non-parametric identification and estimation of an empirical rational inattention discrete choice model. Decision-makers do not observe their realized utility perfectly but can obtain a costly signal to inform them about the utility. This model nests the standard discrete choice model as a special case. We characterize the identified set of decision-makers’ prior beliefs based on cross-sectional market-level choice probabilities. We show that the standard discrete choice model is always observationally equivalent to some rational inattention discrete choice models with costly information. We then characterize the moment conditions that can be used to estimate the model parameters. When an exogenous variation of the choice set is available, we show that we can distinguish the standard discrete choice model from the rational inattention discrete choice model with costly information. We apply the model to study the Fox News effect on the 2000 U.S. presidential election. We compare the voters’ prior beliefs with and without the Fox News influence. The result shows that the presence of Fox News has heterogeneous effects for voters with different educational backgrounds.

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