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Why the Linear Utility Function is a Risky Choice in Discrete-Choice Experiments

  • Michele Sennhauser

    ()

    (Department of Economics, University of Zurich)

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    This article assesses how the form of the utility function in discrete-choice experiments (DCEs) affects estimates of willingness-to-pay (WTP). The utility function is usually assumed to be linear in its attributes. Non-linearities, in the guise of interactions and higher-order terms, are applied only rather ad hoc. This paper sheds some light on this issue by showing that the linear utility function can be a risky choice in DCEs. For this purpose, a DCE conducted in Switzerland to assess preferences for statutory social health insurance is estimated in two ways: first, using a linear utility function; and second, using a non-linear utility function specified according to model specification rules from the econometrics and statistics literature. The results show that not only does the non-linear function outperform the linear specification with regard to goodness-of-fit, but it also generates significantly different WTP. Hence, the functional form of the utility function may have significant impact on estimated WTP. In order to produce unbiased estimates of preferences and to make adequate decisions based on DCEs, the form of the utility function should become more prominent in future experiments.

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    File URL: http://www.soi.uzh.ch/research/wp/2010/wp1014.pdf
    File Function: first version, 2010
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    Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 1014.

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    Length: 22 pages
    Date of creation: Nov 2009
    Date of revision:
    Handle: RePEc:soz:wpaper:1014
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    1. Stefan Boes & Kevin E. Staub & Rainer Winkelmann, 2008. "Relative status and satisfaction," SOI - Working Papers 0816, Socioeconomic Institute - University of Zurich.
    2. Sule Akkoyunlu & Frank R. Lichtenberg & Boriss Siliverstovs & Peter Zweifel, 2010. "Spurious correlation in estimation of the health production function: A note," Economics Bulletin, AccessEcon, vol. 30(3), pages 2505-2514.
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    12. Polk, Andreas & Schmutzler, Armin & Müller, Adrian, 2013. "Lobbying and the Power of Multinational Firms," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79875, Verein für Socialpolitik / German Economic Association.
    13. Reinhard Madlener & Weiyu Gao & Ilja Neustadt & Peter Zweifel, 2008. "Promoting renewable electricity generation in imperfect markets: price vs. quantity policies," SOI - Working Papers 0809, Socioeconomic Institute - University of Zurich.
    14. Eugster, Patrick & Sennhauser, Michèle & Zweifel, Peter, 2010. "Capping risk adjustment?," Journal of Health Economics, Elsevier, vol. 29(4), pages 499-507, July.
    15. Andrew J. Oswald & Rainer Winkelmann, 2008. "Delay and Deservingness after Winning the Lottery," SOI - Working Papers 0815, Socioeconomic Institute - University of Zurich.
    16. Sule Akkoyunlu & Ilja Neustadt & Peter Zweifel, 2008. "Why does the amount of income redistribution differ between United States and Europe? The Janus face of Switzerland," SOI - Working Papers 0810, Socioeconomic Institute - University of Zurich.
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