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The Representative Consumer Approximation Bias in Discrete Choice Welfare Analysis

Author

Listed:
  • Min Qiang Zhao

    (Xiamen University)

  • Ju-Chin Huang

    (University of New Hampshire)

Abstract

Discrete choice welfare analysis is essential in non-market valuation to accompany studies using choice experiments and recreation choice models. McFadden (in: Melvin, Moore, Riezman (eds) Trade, theory and econometrics: essays in honor of John S. Chipman, Routledge, London, 1999) shows that discrete choice welfare measures derived by the common representative consumer approach can be biased under nonlinear income effects, and the percentage bias increases monotonically with the size of quality improvement. We present contrary results that percentage measurement errors in such welfare measures can go either direction and provide conditions under which the direction of bias can be identified. We also show that price and non-price variables play different roles in discrete choice welfare analysis.

Suggested Citation

  • Min Qiang Zhao & Ju-Chin Huang, 2018. "The Representative Consumer Approximation Bias in Discrete Choice Welfare Analysis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(4), pages 969-984, December.
    • Handle: RePEc:kap:enreec:v:71:y:2018:i:4:d:10.1007_s10640-017-0191-y
    DOI: 10.1007/s10640-017-0191-y
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    References listed on IDEAS

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    Cited by:

    1. Wuyang Hu & Shan Sun & Jerrod Penn & Ping Qing, 2022. "Dummy and effects coding variables in discrete choice analysis," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1770-1788, October.

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    More about this item

    Keywords

    Welfare analysis; Discrete choice models; Nonlinear income effects;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D60 - Microeconomics - - Welfare Economics - - - General

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