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Incorrectly accounting for taste heterogeneity in choice experiments: Does it really matter for welfare measurement?

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  • Colombo, Sergio
  • Hanley, Nicholas
  • Torres, Cati

Abstract

A range of empirical approaches to representing preference heterogeneity have emerged in choice modelling. Researchers have been able to explore the differences which selection of a particular approach makes to welfare measures in a particular dataset, and indeed have been able to implement a number of tests for which approach best fits a particular set of data. However, the question as to the degree of error in welfare estimation from an inappropriate choice of empirical approach has not been addressed. In this paper, we use Monte Carlo analysis to address this question. Given the high popularity of both the random parameter logit (RPL) and latent class models among choice modellers, we examine the errors in welfare estimates from using the incorrect model to account for taste preference heterogeneity. Our main finding is that using an RPL specification with log-normally distributed preferences seems the best bet.

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Bibliographic Info

Paper provided by University of Stirling, Division of Economics in its series Stirling Economics Discussion Papers with number 2011-02.

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Date of creation: Feb 2011
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Handle: RePEc:stl:stledp:2011-02

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Postal: Division of Economics, University of Stirling, Stirling, Scotland FK9 4LA
Phone: +44 (0)1786 467473
Fax: +44 (0)1786 467469
Web page: http://www.econ.stir.ac.uk/
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Keywords: Monte Carlo analysis; choice experiments; efficiency; accuracy; welfare measurement; preference heterogeneity;

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  1. Kling, Catherine L. & Herriges, Joseph A., 1997. "Model Performance of Nested Logit Models when Welfare Estimation is the Goal, The," Staff General Research Papers 12331, Iowa State University, Department of Economics.
  2. Jayson L. Lusk & F. Bailey Norwood, 2005. "Effect of Experimental Design on Choice-Based Conjoint Valuation Estimates," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 771-785.
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  5. Kling, Catherine L., 1988. "Reliability of Estimates of Environmental Benefits from Recreation Demand Models (The)," Staff General Research Papers 1587, Iowa State University, Department of Economics.
  6. Herriges, Joseph A. & Kling, Catherine L., 1997. "Performance of Nested Logit Models when Welfare Estimation Is the Goal (The)," Staff General Research Papers 1480, Iowa State University, Department of Economics.
  7. Hanley, Nicholas & Riera, Antoni & Torres, Cati, 2010. "How wrong can you be? Implications of incorrect utility function specification for welfare measurement in choice experiments," Stirling Economics Discussion Papers 2010-12, University of Stirling, Division of Economics.
  8. Kling, Catherine L., 1989. "The Importance Of Functional Form In The Estimation Of Welfare," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(01), July.
  9. Catherine L. Kling & Cynthia J. Thomson, 1996. "The Implications of Model Specification for Welfare Estimation in Nested Logit Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 103-114.
  10. Kling, Catherine L., 1997. "Evaluation of the Gains from Combining Travel Cost and Contingent Valuation Data to Value Nonmarket Goods (An)," Staff General Research Papers 1598, Iowa State University, Department of Economics.
  11. Alberini Anna, 1995. "Efficiency vs Bias of Willingness-to-Pay Estimates: Bivariate and Interval-Data Models," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 169-180, September.
  12. Kling, Catherine L., 1987. "Simulation Approach to Comparing Multiple Site Recreation Demand Models Using Chesapeake Bay Survey Data (A)," Staff General Research Papers 1583, Iowa State University, Department of Economics.
  13. Denzil G. Fiebig & Michael P. Keane & Jordan Louviere & Nada Wasi, 2010. "The Generalized Multinomial Logit Model: Accounting for Scale and Coefficient Heterogeneity," Marketing Science, INFORMS, vol. 29(3), pages 393-421, 05-06.
  14. Colombo, Sergio & Hanley, Nicholas & Louviere, Jordan, 2008. "Modelling preference heterogeneity in stated choice data: an analysis for public goods generated by agriculture," Stirling Economics Discussion Papers 2008-28, University of Stirling, Division of Economics.
  15. Joseph A. Herriges & Catherine L. Kling, 1997. "The Performance of Nested Logit Models When Welfare Estimation Is the Goal," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 792-802.
  16. William Greene & David Hensher, 2010. "Does scale heterogeneity across individuals matter? An empirical assessment of alternative logit models," Transportation, Springer, vol. 37(3), pages 413-428, May.
  17. Peter Boxall & Wiktor Adamowicz, 2002. "Understanding Heterogeneous Preferences in Random Utility Models: A Latent Class Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(4), pages 421-446, December.
  18. Fredrik Carlsson & Peter Martinsson, 2003. "Design techniques for stated preference methods in health economics," Health Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 281-294.
  19. Ferrini, Silvia & Scarpa, Riccardo, 2007. "Designs with a priori information for nonmarket valuation with choice experiments: A Monte Carlo study," Journal of Environmental Economics and Management, Elsevier, vol. 53(3), pages 342-363, May.
  20. Stephen Hynes & Nick Hanley & Riccardo Scarpa, 2008. "Effects on Welfare Measures of Alternative Means of Accounting for Preference Heterogeneity in Recreational Demand Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(4), pages 1011-1027.
  21. Kenneth E. Train, 1998. "Recreation Demand Models with Taste Differences over People," Land Economics, University of Wisconsin Press, vol. 74(2), pages 230-239.
  22. Birol, Ekin & Karousakis, Katia & Koundouri, Phoebe, 2006. "Using a choice experiment to account for preference heterogeneity in wetland attributes: The case of Cheimaditida wetland in Greece," Ecological Economics, Elsevier, vol. 60(1), pages 145-156, November.
  23. Kling, Catherine L., 1989. "Importance of Functional Form in the Estimation of Welfare (The)," Staff General Research Papers 1596, Iowa State University, Department of Economics.
  24. Kling, Catherine L. & Thomson, Cynthia J., 1996. "Implications of Model Specification for Welfare Estimation in Nested Logit Models (The)," Staff General Research Papers 1599, Iowa State University, Department of Economics.
  25. Provencher, Bill & Bishop, R.C.Richard C., 2004. "Does accounting for preference heterogeneity improve the forecasting of a random utility model? A case study," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 793-810, July.
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