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Uncertainty and measurement error in welfare models for risk changes

  • Riddel, Mary

Most welfare models of environmental or mortality risk reductions assume that risks are exogenously determined and known with certainty. However, a growing body of research suggests that uncertainty about risks can affect choices over risky prospects. I present a decision-weighted random-utility model that decomposes welfare losses into those attributable to an increase in the deterministic component of risk and those attributable to uncertainty about risk. I apply the model to an illustrative dataset of subjects' perceived mortality risk and willingness to accept the risk of nuclear-waste transport. I estimate the model using Lewbel's (2000) strictly exogenous regressor approach to account for endogeneity bias and measurement error. Subjects display aversion to both risk and uncertainty about the risk of a transport accident, so that increases in either leads to social-welfare losses. Roughly 12% of the external cost of nuclear-waste transport is attributable to the public's uncertainty about transport risk.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 61 (2011)
Issue (Month): 3 (May)
Pages: 341-354

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Handle: RePEc:eee:jeeman:v:61:y:2011:i:3:p:341-354
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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