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

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  • John C. Whitehead

    () (Department of Economics, Appalachian State University)

Abstract

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.

Suggested Citation

  • John C. Whitehead, 2006. "Improving Willingness to Pay Estimates for Quality Improvements through Joint Estimation with Quality Perceptions," Southern Economic Journal, Southern Economic Association, vol. 73(1), pages 100-111, July.
  • Handle: RePEc:sej:ancoec:v:73:1:y:2006:p:100-111
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    References listed on IDEAS

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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," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(01), pages 177-184, April.
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    6. 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.
    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:ags:joaaec: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 & 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.
    11. Viscusi, W Kip, 1989. "Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-263, September.
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    13. Basil E. Stumborg & Kenneth A. Baerenklau & Richard C. Bishop, 2001. "Nonpoint Source Pollution and Present Values: A Contingent Valuation Study of Lake Mendota," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(1), pages 120-132.
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    Citations

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    Cited by:

    1. Lanz, Bruno & Provins, Allan, 2017. "Using averting expenditures to estimate the demand for public goods: Combining objective and perceived quality," Resource and Energy Economics, Elsevier, vol. 47(C), pages 20-35.
    2. Olivier Beaumais & Anne Briand & Katrin Millock & Céline Nauges, 2010. "What are Households Willing to Pay for Better Tap Water Quality ? A Cross-Country Valuation Study," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00497453, HAL.
    3. repec:gam:jsusta:v:9:y:2017:i:6:p:930-:d:100351 is not listed on IDEAS
    4. Christophe Bontemps & Céline Nauges, 2016. "The Impact of Perceptions in Averting-decision Models: An Application of the Special Regressor Method to Drinking Water Choices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(1), pages 297-313.
    5. Lyssenko, Nikita & Martinez-Espineira, Roberto, 2009. "`Been there done that': Disentangling option value effects from user heterogeneity when valuing natural resources with a use component," MPRA Paper 21976, University Library of Munich, Germany, revised 08 Apr 2010.
    6. Kassahun, Habtamu Tilahun & Nicholson, Charles F. & Jacobsen, Jette Bredahl & Steenhuis, Tammo S., 2016. "Accounting for user expectations in the valuation of reliable irrigation water access in the Ethiopian highlands," Agricultural Water Management, Elsevier, vol. 168(C), pages 45-55.
    7. Bruno Lanz & Allan Provins, 2014. "The demand for tap water quality: Survey evidence on water hardness and aesthetic quality," CIES Research Paper series 23-2014, Centre for International Environmental Studies, The Graduate Institute.
    8. Devkota, Nirmala & Paudel, Krishna P. & Parajuli, Shanta, 2009. "Broiler Producers’ Willingness To Pay To Manage Nutrient Pollution," 2009 Annual Meeting, January 31-February 3, 2009, Atlanta, Georgia 46825, Southern Agricultural Economics Association.
    9. Nauges, Céline & Van Den Berg, Caroline, 2009. "Perception of Health Risk and Averting Behavior: An Analysis of Household Water Consumption in Southwest Sri Lanka," TSE Working Papers 09-139, Toulouse School of Economics (TSE).
    10. Céline Nauges & Dale Whittington, 2010. "Estimation of Water Demand in Developing Countries: An Overview," World Bank Research Observer, World Bank Group, vol. 25(2), pages 263-294, August.
    11. Khatri-Chhetri, Arun & Collins, Alan R., 2011. "Estimation of a Surface Water Quality Valuation Index for the Appalachian Region," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103653, Agricultural and Applied Economics Association.
    12. William F. Vásquez & Pallab Mozumder & Dina Franceschi, 2015. "Water Quality, Household Perceptions and Averting Behavior: Evidence from Nicaragua," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 1-21, December.
    13. Onjala, Joseph & Ndiritu, Simon Wagura & Stage, Jesper, 2013. "Risk Perception, Choice of Drinking Water, and Water Treatment: Evidence from Kenyan Towns," Discussion Papers dp-13-10-efd, Resources For the Future.
    14. Zhou, Li & Lei, Lei, 2017. "Can money always talk? : implication for environmental compensation by international agribusiness," IDE Discussion Papers 641, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    15. repec:wsi:wepxxx:v:03:y:2017:i:01:n:s2382624x16500193 is not listed on IDEAS
    16. Armand, Totouom Fotue Luc, 2016. "Determinants of household avoidance behavior to cope with unsafe drinking water: case study of Cameroon," 2016 AAAE Fifth International Conference, September 23-26, 2016, Addis Ababa, Ethiopia 249333, African Association of Agricultural Economists (AAAE).
    17. Marius Yapo & Jie He & Bruno Gagnon & Luc Savard & Roland Leduc, 2015. "La valeur économique pour l’amélioration de la qualité de l’eau: le cas de la rivière Magog et du lac Magog (Québec, Canada)," Cahiers de recherche 15-15, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    18. Mahmoud K. El-Jafari, 2013. "Palestinian Household Willingness and Ability to Pay for Public Utilities in The West Bank: The Case of Electricity and Water," Working Papers 784, Economic Research Forum, revised Oct 2013.
    19. repec:kap:enreec:v:68:y:2017:i:2:d:10.1007_s10640-016-0021-7 is not listed on IDEAS
    20. repec:gii:ciesrp:cies_rp_36rev is not listed on IDEAS

    More about this item

    JEL classification:

    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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