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A new baseline model for estimating willingness to pay from discrete choice models

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  • Carson, Richard T.
  • Czajkowski, Mikołaj

Abstract

We show a substantive problem exists with the widely-used ratio of coefficients approach to calculating willingness to pay (WTP) from discrete choice models. The correctly calculated standard error for WTP using this approach is shown to be undefined. This occurs because the cost parameter's standard error implies some possibility the true parameter value is arbitrarily close to zero. We propose a simple yet elegant way to overcome this problem by reparameterizing the (negative) cost variable's coefficient using an exponential transformation to enforce the theoretically correct positive coefficient. With it the confidence interval for WTP is now finite and well behaved.

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  • Carson, Richard T. & Czajkowski, Mikołaj, 2019. "A new baseline model for estimating willingness to pay from discrete choice models," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 57-61.
    • Handle: RePEc:eee:jeeman:v:95:y:2019:i:c:p:57-61
    DOI: 10.1016/j.jeem.2019.03.003
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    More about this item

    Keywords

    Conditional logit; Confidence intervals; Contingent valuation delta method; Discrete choice experiment; Krinsky-Robb; Multinomial logit; Probit; Welfare measures;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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