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Improving Willingness to Pay Estimates for Quality Improvements through Joint Estimation with Quality Perceptions

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Author Info
John C. Whitehead () (Department of Economics, Appalachian State University)

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Abstract

Willingness to pay for quality change may depend on heterogeneous perceived quality levels. Contingent valuation studies should include measures of quality perceptions as covariates in the willingness to pay model in order to avoid omitted variable bias. Variation in quality perceptions across respondents leads to a potential endogeneity of quality perceptions. I address the potential for endogeneity bias using an instrumental variables approach in which a measure of quality perceptions is included as a determinant of willingness to pay and is simultaneously determined by various exogenous factors. The willingness to pay model is estimated jointly with quality perceptions allowing for correlation of the error terms. Using data on willingness to pay for water quality improvements in the Neuse River in North Carolina, I reject exogeneity of perceived quality. Correcting for endogeneity improves the measurement of willingness to pay by differentiating willingness to pay among respondents with heterogeneous quality perceptions.

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Publisher Info
Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 73 (2006)
Issue (Month): 1 (July)
Pages: 100–111
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Handle: RePEc:sej:ancoec:v:73:1:y:2006:p:100-111

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Find related papers by JEL classification:
Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Cameron, Trudy Ann & Huppert, Daniel D., 1989. "OLS versus ML estimation of non-market resource values with payment card interval data," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 230-246, November. [Downloadable!] (restricted)
  2. Hurley, Terrance M & Otto, Daniel & Holtkamp, Janice, 1999. "Valuation of Water Quality in Livestock Regions: An Application to Rural Watersheds in Iowa," Journal of Agricultural & Applied Economics, Southern Agricultural Economics Association, vol. 31(1), pages 177-84, April.
  3. Hoehn, John P. & Randall, Alan, 2002. "The effect of resource quality information on resource injury perceptions and contingent values," Resource and Energy Economics, Elsevier, vol. 24(1-2), pages 13-31, February. [Downloadable!] (restricted)
  4. John C. Whitehead & Thomas J. Hoban & William B. Clifford, 2001. "Willingness to Pay for Agricultural Research and Extension Programs," Journal of Agricultural & Applied Economics, Southern Agricultural Economics Association, vol. 33(1), pages 91-101, April.
  5. Danielson, Leon, et al, 1995. "Measuring the Benefits of Local Public Goods: Environmental Quality in Gaston County, North Carolina," Applied Economics, Taylor and Francis Journals, vol. 27(12), pages 1253-60, December.
  6. Hoehn, John P. & Randall, Alan, 1987. "A satisfactory benefit cost indicator from contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 226-247, September. [Downloadable!] (restricted)
  7. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May. [Downloadable!] (restricted)
  8. 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.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. NAUGES Céline & WHITTINGTON Dale, 2008. "Estimation of Water Demand in Developing Countries: An Overview," Working Papers 08.20.264, LERNA, University of Toulouse. [Downloadable!]
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