Accounting for Uncertainty in Willingness to Pay for Environmental Benefits

39 Pages Posted: 3 Sep 2013

See all articles by Ricardo Daziano

Ricardo Daziano

Cornell University

Martin Achtnicht

Leibniz Institute of Urban and Regional Development; ZEW – Leibniz Centre for European Economic Research

Date Written: May 15, 2013

Abstract

Previous literature on the distribution of willingness to pay has focused on its heterogeneity distribution without addressing exact interval estimation. In this paper we derive and analyze Bayesian confidence sets for quantifying uncertainty in the determination of willingness to pay for carbon dioxide abatement. We use two empirical case studies: household decisions of energy-efficient heating versus insulation, and purchase decisions of ultra-low-emission vehicles. We first show that deriving credible sets using the posterior distribution of the willingness to pay is straightforward in the case of deterministic consumer heterogeneity. However, when using individual estimates, which is the case for the random parameters of the mixed logit model, it is complex to define the distribution of interest for the interval estimation problem. This latter problem is actually more involved than determining the moments of the heterogeneity distribution of the willingness to pay using frequentest econometrics. A solution that we propose is to derive and then summarize the distribution of point estimates of the individual willingness to pay under different loss functions.

Keywords: Discrete Choice Models, Willingness to Pay, Credible Sets

JEL Classification: C25, D12, Q51

Suggested Citation

Daziano, Ricardo and Achtnicht, Martin, Accounting for Uncertainty in Willingness to Pay for Environmental Benefits (May 15, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-059, Available at SSRN: https://ssrn.com/abstract=2319335 or http://dx.doi.org/10.2139/ssrn.2319335

Ricardo Daziano

Cornell University ( email )

Ithaca, NY 14853
United States

Martin Achtnicht (Contact Author)

Leibniz Institute of Urban and Regional Development ( email )

Weberplatz 1
Dresden, 01217
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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