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Uncertainty and measurement error in welfare models for risk changes

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  • Riddel, Mary

Abstract

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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  • Riddel, Mary, 2011. "Uncertainty and measurement error in welfare models for risk changes," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 341-354, May.
  • Handle: RePEc:eee:jeeman:v:61:y:2011:i:3:p:341-354
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    Cited by:

    1. Gawande, Kishore & Jenkins-Smith, Hank & Yuan, May, 2013. "The long-run impact of nuclear waste shipments on the property market: Evidence from a quasi-experiment," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 56-73.
    2. repec:bla:jageco:v:68:y:2017:i:3:p:682-709 is not listed on IDEAS
    3. Arvaniti, Maria, 2016. "Uncertainty, Extreme Outcomes and Climate Change: a critique," CERE Working Papers 2016:11, CERE - the Center for Environmental and Resource Economics.
    4. Watanabe Masahide & Kawata Yukichika, 2017. "What Extent of Welfare Loss is Caused by the Disparity between Perceived and Scientific Risks? A Case Study of Food Irradiation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(1), pages 1-17, February.
    5. Masahide Watanabe & Toshio Fujimi, 2015. "Evaluating Change in Objective Ambiguous Mortality Probability: Valuing Reduction in Ambiguity Size and Risk Level," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(1), pages 1-15, January.
    6. Huhtala, Anni & Remes, Piia, 2017. "Quantifying the social costs of nuclear energy: Perceived risk of accident at nuclear power plants," Energy Policy, Elsevier, vol. 105(C), pages 320-331.
    7. Leiter, Andrea M. & Rheinberger, Christoph M., 2016. "Risky sports and the value of safety information," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 328-345.
    8. Fumihiro Yamane & Kyohei Matsushita & Toshio Fujimi & Hideaki Ohgaki & Kota Asano, 2014. "A Simple Way to Elicit Subjective Ambiguity: Application to Low-dose Radiation Exposure in Fukushima," Discussion Papers 1417, Graduate School of Economics, Kobe University.
    9. Huhtala, Anni & Remes, Piia, 2016. "Dimming Hopes for Nuclear Power: Quantifying the Social Costs of Perceptions of Risks," Working Papers 57, VATT Institute for Economic Research.
    10. Klaus Glenk & Sergio Colombo, 2013. "Modelling outcome-related risk in choice experiments," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(4), pages 559-578, October.
    11. repec:eee:reensy:v:145:y:2016:i:c:p:373-387 is not listed on IDEAS
    12. Glenk, Klaus & Colombo, Sergio, 2013. "Modelling Outcome-Related Risk in Choice Experiments," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 57(4), December.
    13. Bontemps, Christophe & Nauges, Céline, 2017. "Endogenous Variables in Binary Choice Models: Some Insights for Practitioners," TSE Working Papers 17-855, Toulouse School of Economics (TSE).
    14. Thomas Lundhede & Jette Bredahl Jacobsen & Nick Hanley & Niels Strange & Bo Jellesmark Thorsen, 2015. "Incorporating Outcome Uncertainty and Prior Outcome Beliefs in Stated Preferences," Land Economics, University of Wisconsin Press, vol. 91(2), pages 296-316.
    15. Toshio Fujimi & Masahide Watanabe & Ryuji Kakimoto & Hirokazu Tatano, 2016. "Perceived ambiguity about earthquake and house destruction risks," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 80(2), pages 1243-1256, January.
    16. Cerroni, Simone & Shaw, W. Douglass, 2012. "Does climate change information affect stated risks of pine beetle impacts on forests? An application of the exchangeability method," Forest Policy and Economics, Elsevier, vol. 22(C), pages 72-84.
    17. Toshio Fujimi & Masahide Watanabe & Ryuji Kakimoto & Hirokazu Tatano, 2016. "Perceived ambiguity about earthquake and house destruction risks," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 80(2), pages 1243-1256, January.

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