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

  • John C. Whitehead

Willingness to pay for quality change may depend on heterogeneous perceived quality levels. In these instances, 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. We address the potential for endogeneity bias using an instrumental variable 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 we 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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Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 200508.

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Length: 42 pages
Date of creation: Aug 2005
Date of revision: Aug 2005
Handle: RePEc:nev:wpaper:wp200508
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  1. 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.
  2. repec:jaa:jagape:v:31:y:1999:i:1:p:177-84 is not listed on IDEAS
  3. 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.
  4. 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.
  5. 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.
  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. 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.
  8. 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.
  9. 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.
  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. 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.
  12. 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.
  13. 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.
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