Combinatorial Discrete Choice: Theory and Application to Multinational Production
Discrete choice problems with complementarities among options quickly grow infeasible to solve, since they generically require evaluating all combinations of choices. We develop a solution method that applies whenever choices are weakly complementary or substitutable, using the implied choice monotonicity to discard suboptimal combinations without computing their payoff. It is orders of magnitude faster than existing approaches, finds the global solution, and extends to heterogeneous-agent settings. Using our method, we calibrate a general equilibrium model of multinational firms selecting global production locations to show that complementarities among locations can amplify, dampen, or even reverse the welfare gains from multinational production.
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