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Uncertainty and measurement error in welfare models for risk changes

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  • Riddel, Mary

Abstract

Most welfare models of environmental or mortality risk reductions assume that risks are exogenously determined and known with certainty. However, a growing body of research suggests that uncertainty about risks can affect choices over risky prospects. I present a decision-weighted random-utility model that decomposes welfare losses into those attributable to an increase in the deterministic component of risk and those attributable to uncertainty about risk. I apply the model to an illustrative dataset of subjects' perceived mortality risk and willingness to accept the risk of nuclear-waste transport. I estimate the model using Lewbel's (2000) strictly exogenous regressor approach to account for endogeneity bias and measurement error. Subjects display aversion to both risk and uncertainty about the risk of a transport accident, so that increases in either leads to social-welfare losses. Roughly 12% of the external cost of nuclear-waste transport is attributable to the public's uncertainty about transport risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 61 (2011)
Issue (Month): 3 (May)
Pages: 341-354

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Handle: RePEc:eee:jeeman:v:61:y:2011:i:3:p:341-354

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Web page: http://www.elsevier.com/locate/inca/622870

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Keywords: Risk and uncertainty Decision-weighted utility Subjective expected utility Nuclear-waste transport;

References

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  1. Craig A. Olson, 1981. "An Analysis of Wage Differentials Received by Workers on Dangerous Jobs," Journal of Human Resources, University of Wisconsin Press, vol. 16(2), pages 167-185.
  2. Arthur Lewbel, 1999. "Semiparametric Qualitative Response Model Estimation with Unknown Heteroskedasticity or Instrumental Variables," Boston College Working Papers in Economics 454, Boston College Department of Economics.
  3. Manski, Charles F., 1985. "Semiparametric analysis of discrete response : Asymptotic properties of the maximum score estimator," Journal of Econometrics, Elsevier, vol. 27(3), pages 313-333, March.
  4. Trudy Ann Cameron, 2002. "Individual Option Prices for Climate Change Mitigation," University of Oregon Economics Department Working Papers 2003-9, University of Oregon Economics Department, revised 20 Jul 2002.
  5. Bo E. Honore & Arthur Lewbel, 2002. "Semiparametric Binary Choice Panel Data Models Without Strictly Exogeneous Regressors," Econometrica, Econometric Society, vol. 70(5), pages 2053-2063, September.
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  7. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
  8. Jason F. Shogren & Thomas D. Crocker, 1990. "Risk, Self-Protection, and Ex Ante Economic Value," Center for Agricultural and Rural Development (CARD) Publications 90-wp57, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  9. Trudy Cameron, 2005. "Updating Subjective Risks in the Presence of Conflicting Information: An Application to Climate Change," Journal of Risk and Uncertainty, Springer, vol. 30(1), pages 63-97, January.
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  12. Uzi Segal, 1985. "The Ellsberg Paradox and Risk Aversion: An Anticipated Utility Approach," UCLA Economics Working Papers 362, UCLA Department of Economics.
  13. W. Kip Viscusi & Wesley A. Magat & Joel Huber, 1999. "Smoking Status and Public Responses to Ambiguous Scientific Risk Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 250-270, October.
  14. Mary Riddel & R. Schwer, 2006. "Winners, Losers, and the Nuclear-Waste Dilemma," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(2), pages 317-338, 06.
  15. Treich, Nicolas, 2010. "The value of a statistical life under ambiguity aversion," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 15-26, January.
  16. Mary Riddel, 2009. "Risk Perception, Ambiguity, and Nuclear-Waste Transport," Southern Economic Journal, Southern Economic Association, vol. 75(3), pages 781–797, January.
  17. Feldstein, Martin S, 1969. "Mean-Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 5-12, January.
  18. Horowitz, Joel L, 1992. "A Smoothed Maximum Score Estimator for the Binary Response Model," Econometrica, Econometric Society, vol. 60(3), pages 505-31, May.
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  21. W. Kip Viscusi, 1994. "Mortality Effects of Regulatory Costs and Policy Evaluation Criteria," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 94-109, Spring.
  22. Mary Riddel & W. Shaw, 2006. "A theoretically-consistent empirical model of non-expected utility: An application to nuclear-waste transport," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 131-150, March.
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Cited by:
  1. Fumihiro Yamane & Kyohei Matsushita & Toshio Fujimi & Hideaki Ohgaki & Kota Asano, 2014. "A Simple Way to Elicit Subjective Ambiguity: Application to Low-dose Radiation Exposure in Fukushima," Discussion Papers 1417, Graduate School of Economics, Kobe University.
  2. Klaus Glenk & Sergio Colombo, 2013. "Modelling outcome-related risk in choice experiments," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(4), pages 559-578, October.

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