ON THE COMPATIBILITY OF NESTED LOGIT-MODELS WITH UTILITY MAXIMIZATION

The paper examines the relationship between the nested multinomial logit (NMNL) model and rational consumer behavior. We show that the Daly-Zachary-McFadden (DZM) condition of the validity of stochastic utility maximization in NMNL models is unnecessarily strong and leads too often to rejection of NMNL models with large dissimilarity parameters. In many cases, the distribution of the stochastic utility components in the NMNL model can be modified in a way that preserves the NMNL choice probabilities on a subset of RI, where I is the number of alternatives in the choice set. On this subset, the DZM condition can be violated without violating the restrictions of stochastic utility maximization. © 1990.