Including cost income ratio into utility function as a way of dealing with ‘exploding’ implicit prices in mixed logit models
The estimates of mean WTP are typically of main interest in non-market valuation studies. In the case of mixed logit models the distribution of WTP for an attribute is derived from the distribution of the ratio of individual coefficients. Since the cost coefficient enters the denominator, its distribution plays a major role in the distribution of WTP. A standard practice in analysing the data from choice experiments is to assume the cost coefficient is fixed, which implies that there is no heterogeneity in price sensitivity. The three most commonly given reasons for this are: (i) the distribution of the marginal willingness-to-pay for an attribute is then simply the distribution of that attribute's coefficient; (ii) in this way analysts wish to restrict the price variable to be non-positive for all individuals; and (iii) analysts avoid assuming log-normal cost because it is often found to produce behaviourally implausible estimates. Constraining a price coefficient to be fixed can however have serious consequences, i.e. a constant price coefficient implies that the standard deviations of unobserved utility is the same for all observations which can lead to biased results. Respondents are also likely to vary in price sensitivities, thus ignoring this variation can lead to erroneous interpretation and conclusions. In this paper we demonstrate a choice experiment exercise in which specifying a log-normal cost results in implausibly large WTP, however, adding into the utility function the cost income ratio prevents implicit prices from ‘exploding’.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 18 (2012)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/bibliographic|
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.:
- Scarpa Riccardo & Thiene Mara & Marangon Francesco, 2007.
"The Value of Collective Reputation for Environmentally-Friendly Production Methods: The Case of Val di Gresta,"
Journal of Agricultural & Food Industrial Organization,
De Gruyter, vol. 5(1), pages 1-28, September.
- Ricardo Scarpa & Mara Thiene & Francesco Marangon, 2007. "The Value of Collective Reputation for Environmentally Friendly Production Methods: The Case of Val di Gresta," Working Papers in Economics 07/11, University of Waikato, Department of Economics.
- Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
- Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, November.
- Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, November.
- Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2.
- David Hensher & William Greene, 2003. "The Mixed Logit model: The state of practice," Transportation, Springer, vol. 30(2), pages 133-176, May.
- David Revelt & Kenneth Train, 1998. "Mixed Logit With Repeated Choices: Households' Choices Of Appliance Efficiency Level," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 647-657, November.
- Andrew Daly & Stephane Hess & Kenneth Train, 2012. "Assuring finite moments for willingness to pay in random coefficient models," Transportation, Springer, vol. 39(1), pages 19-31, January.
- Carlsson, Fredrik & Frykblom, Peter & Liljenstolpe, Carolina, 2003. "Valuing wetland attributes: an application of choice experiments," Ecological Economics, Elsevier, vol. 47(1), pages 95-103, November. Full references (including those not matched with items on IDEAS)