Discrete Choice Models with Multiple Unobserved Choice Characteristics

Susan Athey, Guido W. Imbens
International Economic Review. December
2007, Vol. 48, Issue 4, Pages 1159–1192

Since the pioneering work by Daniel McFadden, utility-maximization-based multinomial response models have become important tools of empirical researchers. Various generalizations of these models have been developed to allow for unobserved heterogeneity in taste parameters and choice characteristics. Here we investigate how rich a specification of the unobserved components is needed to rationalize arbitrary choice patterns in settings with many individual decision makers, multiple markets, and large choice sets. We find that if one restricts the utility function to be monotone in the unobserved choice characteristics, then up to two unobserved choice characteristics may be needed to rationalize the choices.