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

Author

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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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    References listed on IDEAS

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    Cited by:

    1. repec:eee:transb:v:101:y:2017:i:c:p:72-88 is not listed on IDEAS
    2. Bruno Wichmann & Minjie Chen & Wiktor Adamowicz, 2016. "Social Networks and Choice Set Formation in Discrete Choice Models," Econometrics, MDPI, Open Access Journal, vol. 4(4), pages 1-26, October.
    3. Thiene, Mara & Swait, Joffre & Scarpa, Riccardo, 2017. "Choice set formation for outdoor destinations: The role of motivations and preference discrimination in site selection for the management of public expenditures on protected areas," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 152-173.
    4. repec:eee:jeeman:v:88:y:2018:i:c:p:159-179 is not listed on IDEAS

    More about this item

    Keywords

    Choice model; Choice set formation; Random utility; Welfare measures;

    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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