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

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  • John C. Whitehead

Abstract

Willingness to pay for quality change may depend on heterogeneous perceived quality levels. In these instances, 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. We 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 we 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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File URL: http://econ.appstate.edu/RePEc/pdf/wp0509.pdf
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Bibliographic Info

Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 05-09.

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Date of creation: 2005
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Publication status: Forthcoming in Southern Economic Journal
Handle: RePEc:apl:wpaper:05-09

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Postal: Thelma C. Raley Hall, Boone, North Carolina 28608
Phone: 828-262-2148
Fax: 828-262-6105
Web page: http://www.business.appstate.edu/departments/economics/
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  1. John C. Whitehead & Timothy Haab & Ju-Chin Huang, . "Part-Whole Bias in Contingent Valuation: Will Scope Effects Be Detected with Inexpensive Survey Methods?," Working Papers 9707, East Carolina University, Department of Economics.
  2. 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.
  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.
  4. 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.
  5. Clifford, William B. & Hoban, Thomas J. & Whitehead, John C., 2001. "Willingness To Pay For Agricultural Research And Extension Programs," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(01), April.
  6. Mi-Jung Um & Seung-Jun Kwak & Tai-Yoo Kim, 2002. "Estimating Willingness to Pay for Improved Drinking Water Quality Using Averting Behavior Method with Perception Measure," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(3), pages 285-300, March.
  7. 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.
  8. Seung-Hoon Yoo & Hee-Jong Yang, 2001. "Application of Sample Selection Model to Double-Bounded Dichotomous Choice Contingent Valuation Studies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(2), pages 147-163, October.
  9. Blomquist, Glenn C. & Whitehead, John C., 1998. "Resource quality information and validity of willingness to pay in contingent valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 179-196, June.
  10. 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.
  11. repec:jaa:jagape:v:31:y:1999:i:1:p:177-84 is not listed on IDEAS
  12. Hurley, Terrance M. & Otto, Daniel M. & Holtkamp, Janice, 1999. "Valuation Of Water Quality In Livestock Regions: An Application To Rural Watersheds In Iowa," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(01), April.
  13. John C. Whitehead, 2002. "Incentive Incompatibility and Starting-Point Bias in Iterative Valuation Questions," Land Economics, University of Wisconsin Press, vol. 78(2), pages 285-297.
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Cited by:
  1. Khatri-Chhetri, Arun & Collins, Alan R., 2011. "Estimation of a Surface Water Quality Valuation Index for the Appalachian Region," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103653, Agricultural and Applied Economics Association.
  2. Devkota, Nirmala & Paudel, Krishna P. & Parajuli, Shanta, 2009. "Broiler Producers’ Willingness To Pay To Manage Nutrient Pollution," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46825, Southern Agricultural Economics Association.
  3. Céline Nauges & Dale Whittington, 2010. "Estimation of Water Demand in Developing Countries: An Overview," World Bank Research Observer, World Bank Group, vol. 25(2), pages 263-294, August.
  4. Onjala, Joseph & Ndiritu, Simon Wagura & Stage, Jesper, 2013. "Risk Perception, Choice of Drinking Water, and Water Treatment: Evidence from Kenyan Towns," Discussion Papers dp-13-10-efd, Resources For the Future.
  5. Olivier Beaumais & Anne Briand & Katrin Millock & Céline Nauges, 2010. "What are Households Willing to Pay for Better Tap Water Quality ? A Cross-Country Valuation Study," Documents de travail du Centre d'Economie de la Sorbonne 10051, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  6. repec:hal:journl:halshs-00497453 is not listed on IDEAS
  7. Lyssenko, Nikita & Martinez-Espineira, Roberto, 2009. "`Been there done that': Disentangling option value effects from user heterogeneity when valuing natural resources with a use component," MPRA Paper 21976, University Library of Munich, Germany, revised 08 Apr 2010.

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