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Biases in Willingness-To-Pay Measures from Multinomial Logit Estimates due to Unobserved Heterogeneity

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Author Info

  • Vincent van den Berg

    (VU University Amsterdam)

  • Eric Kroes

    (VU University Amsterdam)

  • Erik T. Verhoef

    (VU University Amsterdam)

Abstract

It is a common finding in empirical discrete choice studies that the estimated mean relative values of the coefficients (i.e. WTP's) from multinomial logit (MNL) estimations differ from those calculated using mixed logit estimations, where the mixed logit has the better statistical fit. However, it is less clear under exactly what circumstances such differences arise, whether they are important, and if they can be seen as biases in the WTP estimates from MNL. We use datasets created by Monte Carlo simulation to test, in a controlled environment, the effects of the different possible sources of bias on the accuracy of WTP's estimated by MNL. Consistent with earlier research we find that random unobserved heterogeneity in the marginal utilities does not in itself biases the MNL estimates. Furthermore, whether or not the unobserved heterogeneity is symmetrically shaped also does not affect the accuracy of the WTP estimates of MNL. However, we find that if two heterogeneous marginal utilities are correlated then the WTP's from MNL may be biased. If the correlation between the marginal utilities is negative, then the bias in the MNL estimate is negative, whereas if the correlation is positive the bias is positive.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-014/3.

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Date of creation: 28 Jan 2010
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Handle: RePEc:dgr:uvatin:20100014

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Web page: http://www.tinbergen.nl

Related research

Keywords: Discrete Choice; Biases in WTP's; Multinomial Logit; Correlated Heterogeneous Marginal Utilities;

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  1. Luis I. Rizzi & Juan de Dios Ort�zar, 2006. "Road Safety Valuation under a Stated Choice Framework," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 40(1), pages 69-94, January.
  2. Bhat, Chandra R., 1998. "Accommodating flexible substitution patterns in multi-dimensional choice modeling: formulation and application to travel mode and departure time choice," Transportation Research Part B: Methodological, Elsevier, vol. 32(7), pages 455-466, September.
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Cited by:
  1. Martine Audibert & Yong He & Jacky Mathonnat, 2013. "Multinomial and Mixed Logit Modeling in the Presence of Heterogeneity: A Two-Period Comparison of Healthcare Provider Choice in Rural China," Working Papers halshs-00846085, HAL.

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