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Discrete choice

In economics, discrete choice models, or qualitative choice models, describe, explain, and predict choices between two or more discrete alternatives, such as entering or not entering the labor market, or choosing between modes of transport. Such choices contrast with standard consumption models in which the quantity of each good consumed is assumed to be a continuous variable. In the continuous case, calculus methods (e.g. first-order conditions) can be used to determine the optimum amount chosen, and demand can be modeled empirically using regression analysis. On the other hand, discrete choice analysis examines situations in which the potential outcomes are discrete, such that the optimum is not characterized by standard first-order conditions. Thus, instead of examining “how much” as in problems with continuous choice variables, discrete choice analysis examines “which one.” However, discrete choice analysis can also be used to examine the chosen quantity when only a few distinct quantities must be chosen from, such as the number of vehicles a household chooses to own and the number of minutes of telecommunications service a customer decides to purchase. Techniques such as logistic regression and probit regression can be used for empirical analysis of discrete choice.

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