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Flexible Mixed Logit with Posterior Analysis: Exploring Willingness-to-Pay for Grid Resilience

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  • Laura-Lucia Richter
  • Melvyn Weeks

Abstract

This paper presents and employs an alternative approach to explore consumer preferences and willingness-to-pay (WTP) for resilience of the electricity grid. The methodological and practical relevance of this approach is demonstrated using the example of the UKs incentive regulation scheme for electricity distribution network operators (DNOs). The estimation strategy exibly accounts for preference heterogeneity in the population, allows for scale heterogeneity (i.e. heterogeneity in the randomness of choice) and exploits individual posterior distributions to improve the estimates. Since the results suggest significant parameter heterogeneity within and across DNOs, it is argued that Ofgem's current method to evaluate consumer preferences and WTP is likely to result in an inefficient level of resilience services. The welfare implications in case of public and private goods and services are discussed. The suggested approach is straightforward to implement, could improve policy evaluations and foster more nuanced and efficient incentive regulation.

Suggested Citation

  • Laura-Lucia Richter & Melvyn Weeks, 2016. "Flexible Mixed Logit with Posterior Analysis: Exploring Willingness-to-Pay for Grid Resilience," Cambridge Working Papers in Economics 1631, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1631
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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1631.pdf
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    References listed on IDEAS

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    1. Arne Hole & Julie Kolstad, 2012. "Mixed logit estimation of willingness to pay distributions: a comparison of models in preference and WTP space using data from a health-related choice experiment," Empirical Economics, Springer, vol. 42(2), pages 445-469, April.
    2. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, January.
    3. Jamasb, Tooraj & Pollitt, Michael, 2007. "Incentive regulation of electricity distribution networks: Lessons of experience from Britain," Energy Policy, Elsevier, vol. 35(12), pages 6163-6187, December.
    4. McNair, Ben J. & Bennett, Jeff & Hensher, David A. & Rose, John M., 2011. "Households' willingness to pay for overhead-to-underground conversion of electricity distribution networks," Energy Policy, Elsevier, vol. 39(5), pages 2560-2567, May.
    5. Hess, Stephane & Stathopoulos, Amanda, 2013. "A mixed random utility — Random regret model linking the choice of decision rule to latent character traits," Journal of choice modelling, Elsevier, vol. 9(C), pages 27-38.
    6. Jamasb, Tooraj & Orea, Luis & Pollitt, Michael, 2012. "Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies," Energy Economics, Elsevier, vol. 34(5), pages 1498-1506.
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    1. repec:eee:appene:v:212:y:2018:i:c:p:141-150 is not listed on IDEAS

    More about this item

    Keywords

    Willingness-to-Pay; electricity service quality; mixed logit; social welfare;

    JEL classification:

    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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