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The effect of choice set misspecification on welfare measures in random utility models

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  • Li, Lianhua
  • Adamowicz, Wiktor
  • Swait, Joffre

Abstract

Random utility models have been widely employed in environmental valuation. But stochastic choice set formation models in the random utility framework are rarely applied in this literature, although previous research has shown that ignoring choice set formation (when it exists) leads to biased parameter estimates and welfare measures. This paper conducts Monte Carlo (MC) experiments to investigate the directionality and magnitude of welfare measure bias arising from ignoring or misspecifying choice set formation. We find that when attribute cutoff-based choice set formation exists in the data generation process, typical RUM models ignoring or misspecifying choice set formation underestimate welfare measures by 30–50%. Models that approximate choice set formation may produce unbiased welfare measures, but constitute a promising area for future research. This paper illustrates the importance of applying choice set formation in environmental valuation and provides practical guidance about the usage of stochastic choice set formation models.

Suggested Citation

  • Li, Lianhua & Adamowicz, Wiktor & Swait, Joffre, 2015. "The effect of choice set misspecification on welfare measures in random utility models," Resource and Energy Economics, Elsevier, vol. 42(C), pages 71-92.
    • Handle: RePEc:eee:resene:v:42:y:2015:i:c:p:71-92
    DOI: 10.1016/j.reseneeco.2015.07.001
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    8. Edenbrandt, Anna Kristina & Lagerkvist, Carl-Johan & Lüken, Malte & Orquin, Jacob L., 2022. "Seen but not considered? Awareness and consideration in choice analysis," Journal of choice modelling, Elsevier, vol. 45(C).
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    10. Tsoleridis, Panagiotis & Choudhury, Charisma F. & Hess, Stephane, 2022. "Deriving transport appraisal values from emerging revealed preference data," Transportation Research Part A: Policy and Practice, Elsevier, vol. 165(C), pages 225-245.
    11. Börger, Tobias & Ngoc, Quach Thi Khanh & Kuhfuss, Laure & Hien, Tang Thi & Hanley, Nick & Campbell, Danny, 2021. "Preferences for coastal and marine conservation in Vietnam: Accounting for differences in individual choice set formation," Ecological Economics, Elsevier, vol. 180(C).
    12. Marley, A.A.J. & Swait, J., 2017. "Goal-based models for discrete choice analysis," Transportation Research Part B: Methodological, Elsevier, vol. 101(C), pages 72-88.
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    17. Oehlmann, Malte & Glenk, Klaus & Lloyd-Smith, Patrick & Meyerhoff, Jürgen, 2021. "Quantifying landscape externalities of renewable energy development: Implications of attribute cut-offs in choice experiments," Resource and Energy Economics, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Choice model; Choice set formation; Random utility; Welfare measures;
    All these keywords.

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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