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Improving Willingness to Pay Estimates for Quality Improvements through Joint Estimation with Quality Perceptions

  • John C. Whitehead

    ()

    (Department of Economics, Appalachian State University)

Willingness to pay for quality change may depend on heterogeneous perceived quality levels. Contingent valuation studies should include measures of quality perceptions as covariates in the willingness to pay model in order to avoid omitted variable bias. Variation in quality perceptions across respondents leads to a potential endogeneity of quality perceptions. I address the potential for endogeneity bias using an instrumental variables approach in which a measure of quality perceptions is included as a determinant of willingness to pay and is simultaneously determined by various exogenous factors. The willingness to pay model is estimated jointly with quality perceptions allowing for correlation of the error terms. Using data on willingness to pay for water quality improvements in the Neuse River in North Carolina, I reject exogeneity of perceived quality. Correcting for endogeneity improves the measurement of willingness to pay by differentiating willingness to pay among respondents with heterogeneous quality perceptions.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 73 (2006)
Issue (Month): 1 (July)
Pages: 100–111

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Handle: RePEc:sej:ancoec:v:73:1:y:2006:p:100-111
Contact details of provider: Web page: http://www.southerneconomic.org/
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  1. Hurley, Terrance M. & Otto, Daniel & Holtkamp, Janice, 1999. "Valuation of Water Quality in Livestock Regions: An Application to Rural Watersheds in Iowa," Staff General Research Papers 5151, Iowa State University, Department of Economics.
  2. Hoehn, John P. & Randall, Alan, 2002. "The effect of resource quality information on resource injury perceptions and contingent values," Resource and Energy Economics, Elsevier, vol. 24(1-2), pages 13-31, February.
  3. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  4. Blomquist, Glenn C. & Whitehead, John C., 1998. "Resource quality information and validity of willingness to pay in contingent valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 179-196, June.
  5. Viscusi, W Kip, 1989. " Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-63, September.
  6. John C. Whitehead & Timothy C. Haab & Ju-Chin Huang, 1998. "Part-Whole Bias in Contingent Valuation: Will Scope Effects Be Detected with Inexpensive Survey Methods?," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 160-168, July.
  7. Hoehn, John P. & Randall, Alan, 1987. "A satisfactory benefit cost indicator from contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 226-247, September.
  8. repec:jaa:jagape:v:31:y:1999:i:1:p:177-84 is not listed on IDEAS
  9. Clifford, William B. & Hoban, Thomas J. & Whitehead, John C., 2001. "Willingness To Pay For Agricultural Research And Extension Programs," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(01), April.
  10. John C. Whitehead, 2002. "Incentive Incompatibility and Starting-Point Bias in Iterative Valuation Questions," Land Economics, University of Wisconsin Press, vol. 78(2), pages 285-297.
  11. Seung-Hoon Yoo & Hee-Jong Yang, 2001. "Application of Sample Selection Model to Double-Bounded Dichotomous Choice Contingent Valuation Studies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(2), pages 147-163, October.
  12. Cameron, Trudy Ann & Huppert, Daniel D., 1989. "OLS versus ML estimation of non-market resource values with payment card interval data," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 230-246, November.
  13. Mi-Jung Um & Seung-Jun Kwak & Tai-Yoo Kim, 2002. "Estimating Willingness to Pay for Improved Drinking Water Quality Using Averting Behavior Method with Perception Measure," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 21(3), pages 285-300, March.
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