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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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    2. Petrolia, Daniel & Interis, Matthew & Hwang, Joonghyun, 2015. "Single-Choice, Repeated-Choice, and Best-Worst Elicitation Formats: Do Results Differ and by How Much?," Working Papers 212479, Mississippi State University, Department of Agricultural Economics.
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    5. Mikołaj Czajkowski & Nick Hanley & Jacob LaRiviere, 2016. "Controlling for the Effects of Information in a Public Goods Discrete Choice Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(3), pages 523-544, March.
    6. Kwabena Krah & Daniel R Petrolia & Angelica Williams & Keith H Coble & Ardian Harri & Roderick M Rejesus, 2018. "Producer Preferences for Contracts on a Risky Bioenergy Crop," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 40(2), pages 240-258.
    7. Mikołaj Czajkowski & Marek Giergiczny & Jakub Kronenberg & Jeffrey Englin, 2019. "The Individual Travel Cost Method with Consumer-Specific Values of Travel Time Savings," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 961-984, November.
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    11. Tobias Börger & Oliver Frör & Sören Weiß, 2017. "The relationship between perceived difficulty and randomness in discrete choice experiments: Investigating reasons for and consequences of difficulty," Discussion Papers in Environment and Development Economics 2017-03, University of St. Andrews, School of Geography and Sustainable Development.
    12. Tobias Börger & Joseph Cook, 2016. "Giving respondents “time to think” reduces response randomness in repeated discrete choice tasks," Discussion Papers in Environment and Development Economics 2016-13, University of St. Andrews, School of Geography and Sustainable Development.
    13. Vaiknoras, Kate & Norton, George & Alwang, Jeffrey, 2015. "Farmer preferences for attributes of conservation agriculture in Uganda," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 10(2), pages 1-16.
    14. Czajkowski, Mikołaj & Vossler, Christian A. & Budziński, Wiktor & Wiśniewska, Aleksandra & Zawojska, Ewa, 2017. "Addressing empirical challenges related to the incentive compatibility of stated preferences methods," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 47-63.
    15. Penn, Jerrod & Hu, Wuyang, 2017. "The Presence of Hypothetical Bias within Spatial Decay and Charismatic Species: An Application of Monarch and Viceroy Butterflies," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258204, Agricultural and Applied Economics Association.
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    18. Janmaat, Johannus & Geleta, Solomon & Loomis, John, 2019. "Detecting social network effects on willingness to pay for environmental improvements using egocentric network measures," MPRA Paper 96675, University Library of Munich, Germany.

    More about this item

    Keywords

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

    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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