Generalized Estimation Methods for Non-i.i.d. Binary Data: An Application to Dichotomous Choice Contingent Valuation

We challenge the assumption of i.i.d random utility across alternatives embedded in typical applications of logit models to dichotomous choice contingent valuation data. Using a Gumbel mixed distribution which nests a number of traditional models, we show that the logistic distribution is not a suitable distribution for contingent valuation analysis.Research Methods/ Statistical Methods,

Temporal Insensitivity of Willingness to Pay: How do they evaluate in CVM?

In addition to scope and scale embedding effects, temporal insensitivity of willingness to pay, also known as temporal embedding effect, has been a well known anomaly in eliciting willingness to pay for environmental quality change, especially over time. Stevens et al. (1997) defines two types of temporal embedding effects: strong insensitivity and weak insensitivity to payment schedule. This paper proposes an alternative definition of the temporal insensitivity. Temporal insensitivity implies that a subject in the survey responds consistently to value elicitation questions regardless of payment schemes. The sequential test tests the temporal insensitivity using the oyster reef restoration programs in Chesapeake Bay. Test results show that willingness to pay for the program is insensitive to the payment scheme or to the length of benefit stream of the project. Discount rates imbedded in cost stream vary significantly among the combination of project lengths and payment schemes.Temporal insensitivity of willingness to pay, Temporal embedding effect, Implicit discount rate, Sequential test, Demand and Price Analysis,

Asymmetric Search and Loss Aversion: Choice Experiment on Consumer Willingness to Search in the Gasoline Retail Market

Price search enables consumers to overcome information asymmetries, it can lead to a reduction in price dispersion and it can increase consumer surplus, but search is costly. In this paper, an internet survey is conducted among a random sample of 490 drivers in the State of Ohio to answer the question, when are consumers more likely to search? The internet survey affords us the opportunity to impose exogenous price changes in a random sample of gasoline consumers to examine the decision-making process behind intended search decisions. Results indicate that among the respondents who faced prices below their expected price, only 12% chose to search, whereas 45% searched when prices were above. Results suggest that asymmetric search can be explained by prospect theory, in the sense that consumers evaluate current prices compared to a reference price, and as a consequence they value price increases differently from price decreases. Our findings indicate that in the gasoline retail market, consumers are allowing retailers to extract consumer surplus by exhibiting loss aversion because this behavior deters search when the probability of finding a lower price is highest.price search, choice experiment, search cost, gasoline market, Consumer/Household Economics, Demand and Price Analysis, D83, D03,

Common Pool Resources and Social Norms: Internal cost & Less than Full Compliance - Fishery example

We develop a theoretical model that is capable of explaining the existence of sustainable common pool resource equilibria in the absence of external regulation. We combine ideas from the literature on social norms in an iterative game theory framework to establish the existence of multiple sustainable common pool equilibria. Summary: Consider a highly stylized common pool resource (CPR) allocation problem where individual agents have the opportunity to comply or defect from some benchmark behavior. For example, a recreational boater can choose to dispose of trash overboard or haul the trash to shore, or perhaps a polluting firm can choose to meet or exceed a governmental standard for emissions. Traditional neo-classical models of common pool resource allocations predict that rational self-interested agents will tend to over-exploit the CPR in the absence of external regulation. A number of recent studies have documented the existence of common pool resource outcomes that contradict this commonly held belief. In recent years, social norms have been gained much attention from the economists as an important driving force of individual behavior. A number of studies on the management of common pool resources (CPR) through endogenous institutions have argued for the importance of social norms in maintaining efficient, sustainable allocations in the absence of external regulation (Ostrom (1992), Bromley (1992), Baland and Platteau (1996)). Despite the empirical documentation of potentially sustainable outcomes, theoretical explanations remain in their infancy. Since Hardin's(1968) seminal work on the 'tragedy of the commons', a number of models based on neo-classical economics have tried to explain the existence of common pool resource equilibria consisting of partial compliance or defection (Sethi and Somanathan (1996), Haab and McConnell (2002)). Of particular interest, evolutionary models of compliance, which incorporate the behavioral outcomes of others into individual decision making, have proven popular in explaining collective behavior problems associated with sustainable CPR outcomes. However, these evolutionary models fail to incorporate two commonly observed characteristics of common pool resource decision environments: partial compliance equilibria and costly sanctioning behavior. Haab and McConnell (2002) develop a rudimentary evolutionary model of compliance behavior and show that heterogeneous distributions of compliance costs across a population can result in a less than full compliance equilibrium. The model of Haab and McConnell ignores the possibility of endogenous sanctioning of deviant behavior. Other evolutionary models of common pool behavior assume altruistic motives for sanctioning or costless sanctioning. The purpose of this paper is to provide a theoretical explanation for partial compliance equilibria in a common pool resource allocation problem with and without endogenous sanctioning behavior. First, the theoretical possibility of partial compliance equilibrium with exogenous sanctioning behavior and fully observable agent behavior, is presented. Next we introduce uncertainty into the model through the incomplete observation of agent behavior to examine why some agents willingly commit costly sanctioning behaviors. We show that even in the presence of costly, endogenous sanctioning, multiple CPR equilibria exist, including a stable partial compliance equilibrium. Finally, we compare the resulting CPR equilibria to determine the socially efficient outcome, and compare the costs of various policies of achieving such outcomes. An Overview of the Model and Outcomes: Reconsider the stylized CPR problem where individual decision agents can choose to undertake some behavior or not (a binary decision). Assume there are two types of agents: defectors and compliers. Further, compliers can be divided into sub-samples of sheer compliers and enforcers. Defectors do not follow the socially accepted norm and can be punished (sanctioned) by compliers when detected. Sheer compliers follow the social norm but pay a compliance cost (e.g. time value of waste disposal). Enforcers, a subset of compliers, willingly sanction defectors but pay a sanctioning cost (e.g. monitoring cost). The primary difference between the current model and other evolutionary models of behavior is found in the payoff function of the agents. We assume that agents can incur an internal cost of defection (e.g. humiliation) when an agent commits defecting behavior whether or not he is detected. Several studies (Coleman (1987), Kerr et al. (1994), Carwford and Ostrom (1995) and T.C Haab and K.E. McCornell (2001)) have already examined this internal cost. Further, the agent can earn a benefit through enhanced reputation by complying. (Hamilton (1964), Axelrod (1984), Nowak and Simund (1998) and Leimar and Mammerstein (2001)) Internal cost increases as the number of complier increases. Reputation only can be earned when compliance behavior is observed by others thus the size of community of CPR and the proportion of compliers are important. The benefits to defection increase as the number of compliers increases. For example, in a fishery, the more agents complying with the efficient fishing effort the more fish defectors can catch. However, the internal cost to defection increases as the number of compliers increases. The difference between this defecting benefit and defecting cost (internal cost + inflict from sanctioning) increases as the number of compliers increases. On the other hand, the marginal reputation benefit is increasing for low levels of compliance but after some level of compliers, reputation increases at the decreasing rate. A representative individual will compare the marginal net benefit of defection to the marginal reputation of compliance and will choose to defect if the marginal net benefit of defection is greater than the marginal payoff to compliance. A partial compliance equilibrium is sustainable because for compliance populations above the point where the marginal net benefits of defection exceed the marginal net benefits of compliance, the marginal net benefits of defection are greater than the marginal net benefits of compliance, leading to increasing defection. For compliance populations below the point where the marginal net benefits of defection equal the marginal net benefits of compliance, the marginal net benefits of defection are less than the marginal reputation of compliance leading to increasing compliance. With sufficient exogenous sanctioning behavior, by government or authorized party, the marginal net defecting benefit can be reduced thereby achieving a less than full compliance (or full defection) equilibrium. In practice, it's possible that the sanctioning behavior is enforced by endogenous members. The interesting features of this endogenous sanctioning behavior are that it is not only sufficient to maintain sustainable level of CPR but also enforced by rational individuals who would not sanction unless there were a reward. When individual behavior can be observed fully or partially, sanctioning behavior is rewarded in a form of reputation or prestige. Thus there may be sufficient incentive to overcome costly sanctioning behavior. In some environments where information of individual behavior is uncertain, people have incentive to monitor others' strategies in order not to be fooled in the next stage of game. Therefore it can be easily inferred that there is positive relationship between costly sanctioning behavior and earning reputation or getting information of others' behavior, which depends on the availability of information of others' behaviors. In conclusion, with the assumption of sufficient internal cost for defecting behavior and reputation for compliance behavior, a less than full compliance equilibrium with exogenous sanctioning can be explained. Even with endogenous sanctioning, a stable partial compliance equilibrium is possible if people have the incentive to either gather information on other's behavior (in the hidden action case) or to earn reputation in partially observable action case.Resource /Energy Economics and Policy,

REVISITING BID DESIGN ISSUES IN CONTINGENT VALUATION

A uniform bid design from a predetermined uniform distribution is proposed as a practical and robust alternative to existing optimal or naïve bid designs. Analytics and simulations show that the uniform design provides efficiency better than naïve designs under ideal conditions and outperforms optimal designs with poor initial information.Research Methods/ Statistical Methods,

Using Biomedical Technologies to Inform Economic Modeling: Challenges and Opportunities for Improving Analysis of Environmental Policies

Advances in biomedical technology have irrevocably jarred open the black box of human decision making, offering social scientists the potential to validate, reject, refine and redefine the individual models of resource allocation that form the foundation of modern economics. In this paper we (1) provide a comprehensive overview of the biomedical methods that may be harnessed by economists and other social scientists to better understand the economic decision making process; (2) review research that utilizes these biomedical methods to illuminate fundamental aspects of the decision making process; and (3) summarize evidence from this literature concerning the basic tenants of neoclassical utility that are often invoked for positive welfare analysis of environmental policies. We conclude by raising questions about the future path of policy related research and the role biomedical technologies will play in defining that path.neuroeconomics, neuroscience, brain imaging, genetics, welfare economics, utility theory, biology, decision making, preferences, Institutional and Behavioral Economics, Research Methods/ Statistical Methods, D01, D03, D6, D87,

Inconsistent responses in the dichotomous choice contingent valuation with follow-up questions

This essay develops a new method to diagnose inconsistency in dichotomous choice contingent valuation with follow-up questions: in particular, downward bias in the mean WTP. It is shown that the previous methods aimed to explain this inconsistency in responses have ignored statistical inconsistency: non-perfect correlation between the initial and follow-up responses and thus have provided wrong predictions to explain respondents' inconsistency pattern. In addition, from an application of our method, it has been proven that one model can not encompass all other possible inconsistency patterns in responses. Test results show that the behavioral inconsistency patterns are different both within and between data setsResearch Methods/ Statistical Methods,

SOUTHEAST MARINE RECREATIONAL FISHERY STATISTICAL SURVEY: DISTANCE AND CATCH BASED CHOICE SETS

In this paper we estimate the economic value associated with marine recreational fishing in the southeast United States using the random utility model. The data used is the Southeast (North Carolina to Louisiana) Marine Recreational Fishery Statistics Survey (SE MRFSS). The geographic extent of the market and potential catch are used to determine the effect of choice set definition on random utility model parameter and welfare estimates. We find that choice sets based on distance or catch do not lead to large differences in the compensating variation of a fishing trip. Defining choice sets based on catch does lead to insignificant estimates of the effect of one measure of site quality on site selection. We also find differences in the value of an additional fish when comparing alternative measures of site quality.Resource /Energy Economics and Policy,

CHOICE SET CONSIDERATIONS IN MODELS OF RECREATION DEMAND: HISTORY AND CURRENT STATE OF THE ART

Demand and Price Analysis,

NORMS, SELF-SANCTIONING, AND CONTRIBUTIONS TO THE PUBLIC GOOD

The relationship between norms, self-sanctioning, and people’s decisions about contributing to public goods is complex and often misunderstood in the public goods literature. We develop a model in which individuals hold an injunctive norm indicating how much they believe one should contribute to the public good. From the model we derive the following testable hypotheses: an increase in one’s perception of the norm level of contribution to the public good (1) induces negative self-sanctioning and (2) will lead one to contribute more to the public good, and (3) that contributing to the public good induces positive self-sanctioning. To test these hypotheses, we elicit stated preferences for contributions to an organization which offsets carbon emissions and a proxy for self-sanctioning, change in respondent “self-image.”public goods, norms, sanctioning, image, Environmental Economics and Policy, Public Economics, H4, Q5, D0,