Referendum Models and Economic Values: Theoretical, Intuitive, and Practical Bounds on Willingness to Pay
Innovations in the estimation of referendum type contingent valuation models have led to willingness-to-pay (WTP) measures inconsistent with consumer preferences and unbounded from above or below. We propose a set of criteria which guarantee a bounded measure of WTP. The criteria reject the traditional random utility model with unrestricted error terms in favor of the random WTP model with bounds on WTP. Once WTP is bounded by zero and income, the form of the distribution is less consequential. A new model for WTP is developed based on the beta distribution and is compared to previously estimated models.
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