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Behavioral Foundations of Nested Stochastic Choice and Nested Logit

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  • Matthew Kovach
  • Gerelt Tserenjigmid

Abstract

We provide the first behavioral characterization of nested logit, a foundational and widely applied discrete choice model, through the introduction of a non-parametric version of nested logit that we call Nested Stochastic Choice (NSC). NSC is characterized by a single axiom that weakens Independence of Irrelevant Alternatives based on revealed similarity to allow for the similarity effect. Nested logit is characterized by an additional menu-independence axiom. Our axiomatic characterization leads to a practical, data-driven algorithm that identifies the true nest structure from choice data. We also discuss limitations of generalizing nested logit by studying the testable implications of cross-nested logit.

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  • Matthew Kovach & Gerelt Tserenjigmid, 2021. "Behavioral Foundations of Nested Stochastic Choice and Nested Logit," Papers 2112.07155, arXiv.org, revised Feb 2022.
    • Handle: RePEc:arx:papers:2112.07155
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    1. Pavlo R. Blavatskyy, 2024. "Debreu’s choice model," Theory and Decision, Springer, vol. 96(2), pages 297-310, March.
    2. Faro, José Heleno, 2023. "The Luce model with replicas," Journal of Economic Theory, Elsevier, vol. 208(C).
    3. Yaron Azrieli & John Rehbeck, 2022. "Marginal stochastic choice," Papers 2208.08492, arXiv.org.

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