Experience as a conditioning effect on choice – Does it matter whether it is exogenous or endogenous?

Abstract

Hensher and Ho (2017) proposed a way to condition the utility of each alternative in a choice set on experience with the alternatives accumulated over previous periods. The paper found that the overall statistical performance of the mixed logit model improved significantly, suggesting that this conditioning idea has merit. Experience was treated as an exogenous influence linked to the scale of the random component, and to that extent it captures some amount of the heterogeneity in unobserved effects, purging them of potential endogeneity. The current paper continues to investigate the matter of endogeneity versus exogeneity. The proposed approach implements the control function method in the representative component of the relative utility expressions in a choice model. These methods have been investigated by Wooldridge (2005), Train and Petrin (2010), Train and Wilson (2009) and Guevara and Hess (2019), amongst other authors. We develop two choice models, both using stated preference data. The paper extends the received contribution in that we allow for the endogenous variable to have an impact on the attributes through a two stage method, called the Multiple Indicator Solution, also implemented in a different context by Guevara et al. (2019) for a single (crowding) attribute, in which stage two is the popular control function method. In the first stage, the entire utility expression associated with all observed attributes is conditioned on the prior experience with an alternative. Hence, we are capturing possible correlates associated with each and every attribute and not just one selected attribute. We find evidence of potential endogeneity. The purging exercise however, results in both statistical similarities and differences in time and cost choice elasticities and mean estimates of the value of travel time savings. We are able to identify a very practical method to allow for possible endogeneity under heteroscedastic conditioning that will encourage researchers and practitioners to use such an approach in more advanced non-linear discrete choice models as a matter of routine