1. Introduction and Overview. 2. Detecting Influential Observations and Outliers. 3. Detecting and Assessing Collinearity. 4. Applications and Remedies. 5. Research Issues and Directions for Extensions. Bibliography. Author Index. Subject Index.

Regression Diagnostics: Identifying Influential Data and Sources of Collinearity

NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS by Richard H. Thaler and Cass R. Sunstein Penguin Books, 2009, 312 pp, ISBN 978-0-14-311526-7This book is best described formally as a general explanation of and advocacy for libertarian paternalism, a term coined by the authors in earlier publications. Informally, it is about how leaders, systems, organizations, and governments can nudge people to do the things the nudgers want and need done for the betterment of the nudgees, or of society. It is paternalism in the sense that "it is legitimate for choice architects to try to influence people's behavior in order to make their lives longer, healthier, and better", (p. 5) It is libertarian in that "people should be free to do what they like - and to opt out of undesirable arrangements if they want to do so", (p. 5) The built-in possibility of opting out or making a different choice preserves freedom of choice even though people's behavior has been influenced by the nature of the presentation of the information or by the structure of the decisionmaking system. I had never heard of libertarian paternalism before reading this book, and I now find it fascinating.Written for a general audience, this book contains mostly social and behavioral science theory and models, but there is considerable discussion of structure and process that has roots in mathematical and quantitative modeling. One of the main applications of this social system is economic choice in investing, selecting and purchasing products and services, systems of taxes, banking (mortgages, borrowing, savings), and retirement systems. Other quantitative social choice systems discussed include environmental effects, health care plans, gambling, and organ donations. Softer issues that are also subject to a nudge-based approach are marriage, education, eating, drinking, smoking, influence, spread of information, and politics. There is something in this book for everyone.The basis for this libertarian paternalism concept is in the social theory called "science of choice", the study of the design and implementation of influence systems on various kinds of people. The terms Econs and Humans, are used to refer to people with either considerable or little rational decision-making talent, respectively. The various libertarian paternalism concepts and systems presented are tested and compared in light of these two types of people. Two foundational issues that this book has in common with another book, Network of Echoes: Imitation, Innovation and Invisible Leaders, that was also reviewed for this issue of the Journal are that 1 ) there are two modes of thinking (or components of the brain) - an automatic (intuitive) process and a reflective (rational) process and 2) the need for conformity and the desire for imitation are powerful forces in human behavior. …

Nudge: Improving Decisions about Health, Wealth, and Happiness

/pdf/the-theory-of-industrial-organization-19bejph0ej.pdf

The Theory of Industrial Organization

Surveys are frequently used by businesses and governments to elicit information about the public’s preferences. They have become the most common way to gather preference information regarding goods, that are not (or are not yet) bought or sold in markets. In this paper we apply the standard neoclassical economic framework to generate predictions about how rational agents would answer such survey questions, which in turn implies how such survey data should be interpreted. In some situations, the standard economic model would be expected to have no predictive power. For situations where it does have predictive power, we compare different survey formats with respect to: (a) the information that the question itself reveals to the respondent, (b) the strategic incentives the respondent faces in answering the question, and (c) the information revealed by the respondent’s answer.

/pdf/incentive-and-informational-properties-of-preference-12z61l9ef6.pdf

Incentive and informational properties of preference questions

Several recently published studies concerned with the validation of willingness-to-pay estimates derived with the contingent valuation (CV) method have utilized methods similar to experimental economics’ methodologies where experiments are conducted with groups of subjects and responses to both hypothetical and real valuation questions are obtained. It is often— but not always—the case that results from such experiments demonstrate significant differences between responses to the real and hypothetical valuation questions. Such differences are commonly interpreted as reflecting “hypothetical bias.” Concern with hypothetical bias has motivated a growing number of researchers to explore techniques that might eliminate such bias, thereby providing methods from which unbiased estimates for willingness to pay might be obtained with the CV method. One method used in efforts to derive unbiased value estimates relies on calibration techniques. For example, McKinley Blackburn et al. (1994) and Fox et al. (1999) use within-sample techniques where subjects respond to hypothetical and then real valuation questions. A calibration function is then estimated which relates differences in responses obtained in the two treatments to subject characteristics. William Schulze et al. (1999) explore similar techniques where hypothetical willingness to pay is “calibrated” by subjects’ self-reports of embedding. While calibration may prove to be a useful tool for ex post adjustments of stated preference values, its practicality appears to be limited by the extent to which a calibration function derived for one good can be used to calibrate hypothetical values derived for a different good. Indeed, Fox et al. (1999 p. 2) note that: “As our results show, calibration appears to be commodity-specific, and as such, [the calibration approach] must proceed on a case-by-case basis until enough evidence exists to reveal any systematic bias that can eventually lead to a general calibration function.” A second and very different approach to dealing with the hypothetical bias problem focuses on designs for the CV questionnaire that might directly induce subjects to provide responses to hypothetical valuation questions that correspond with responses observed when actual cash payments are involved. To date, efforts to implement this approach have relied on adding to the CV script brief requests that subjects consider budgetary substitutes in responding to the valuation question. Problems encountered with this particular approach are illustrated by Loomis et al. (1994) * Department of Economics, School of Policy Studies, Georgia State University, Atlanta, GA 30303. The authors acknowledge financial support for this work from the U.S. Environmental Protection Agency Contract No. R824710-01-0. Thanks are due to Nicholas Flores, Bill Schulze, and two anonymous reviewers for helpful comments. The authors also gratefully acknowledge the participation of Glenn Harrison in early stages of this research, and the assistance of Harold Ball, Kelly Brown, Kate Gardner, James Murphy, Tom Stevens, and Melonie Williams in conducting experiments. 1 See, as examples, John Loomis et al. (1994), Helen R. Neill et al. (1994), Cummings et al. (1995a), Thomas C. Brown et al. (1996), and John Fox et al. (1999). 2 Two studies report estimates of willingness to pay where hypothetical bias is not identified (David Brookshire and Don Coursey, 1987; Mark Dickie et al., 1987). V. Kerry Smith and Carol Mansfield (1997) fail to find hypothetical bias in an experiment based on willingness to accept. As is discussed later, we also fail to find evidence of hypothetical bias in one particular set of experiments. 3 The methodology used in Schulze et al. (1999) may be described as “adjustment” rather than “calibration” since “true” values (those observed when actual payments are required) which form the basis for calibration are not obtained in their experiments. 4 Similar results are commonly reported in the marketing literature. For example, Jordon Louviere (1996 p. 170) observes that: “I think it very unlikely that one simple and generalizable approach to ‘adjusting’ (stated preference) numbers will be found, despite clear evidence supporting strong monotonic links between stated preferences and actual choices in real markets . . . differences in product awareness, learning, etc. . . ., necessarily imply that no one magic constant can exist across all product categories.”

Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method

On March 23, 1989, the Exxon Valdez ran aground in Alaska's Prince William Sound and released over 250,000 barrels of crude oil, resulting in 1300 miles of oiled shoreline. The Exxon spill ignited a debate about the appropriate compensation for damages suffered, and among economists, a debate concerning the adequacy of methods to value public goods, particularly when the good in question has limited direct use, such as the pristine natural environment of the spill region. The efficacy of stated preference methods generally, and contingent valuation in particular, is no mere academic debate. Billions of dollars are at stake. An influential symposium appearing in this journal in 1994 provided arguments for and against the credibility of these methods, and an extensive research program published in academic journals has continued to this day. This paper assesses what occurred in this academic literature between the Exxon spill and the BP disaster. We will rely on theoretical developments, neoclassical and behavioral paradigms, empirical and experimental evidence, and a clearer elucidation of validity criteria to provide a framework for readers to ponder the question of the validity of contingent valuation and, more generally, stated preference methods.

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.26.4.3

From Exxon to BP: Has Some Number Become Better Than No Number?

This article presents lessons from the rich adoption literature for the nascent research on adaptation. Individuals' adoption choices are affected by profit and risk considerations and by credit and biophysical constraints. New technologies spread gradually, reflecting heterogeneity among potential adopters, processes of learning and technological improvement, and policies and institutions. Adaptation is the response of economic agents and societies to major shocks. We distinguish between reactive and proactive adaptation. The latter is important in the context of climate change and consists of mitigation, reassessment, and innovation that aim to affect the timing and location of shocks. Adaptation strategies also include adoption of innovation and technology transfer across locations, insurance and international trade, and migration and invasions. Recent research emphasizes multidisciplinary collaborations; historical analysis; and the roles of returns to scale of key technologies, social networks, behav...

https://www.annualreviews.org/doi/pdf/10.1146/annurev-resource-083110-115954

Adoption versus adaptation, with emphasis on climate change.

We study a farmer’s decision to convert traditional cropland into land for growing dedicated energy crops, taking into account sunk conversion costs and uncertainties in crop returns. The optimal decision rules differ significantly from the expected net present value rule, which ignores uncertainties, and from real options models that allow only one-way conversion into energy crops. These models also predict drastically different patterns of land conversions into and out of energy crops over time. Using corn– soybean rotation and switchgrass as examples, we show that the model predictions are sensitive to assumptions about stochastic processes of the returns. Government policies might have unintended consequences: subsidizing conversion costs into switchgrass may not much affect proportions of land in switchgrass in the long run.

Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility

Because of payoff uncertainties combined with risk aversion and/or real options, farmers may demand a premium in order to adopt conservation tillage practices, over and above the compensation for the expected profit losses (if any). We propose a method of directly estimating the financial incentives for adopting conservation tillage and distinguishing between the expected payoff and premium of adoption based on observed behavior. We find that the premium may play a significant role in farmers' adoption decisions.

Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior

https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1273&context=card_workingpapers

Jinhua Zhao

Papers

From Exxon to BP: Has Some Number Become Better Than No Number?

Adoption versus adaptation, with emphasis on climate change.

Switching to Perennial Energy Crops Under Uncertainty and Costly Reversibility

Green Subsidies in Agriculture: Estimating the Adoption Costs of Conservation Tillage from Observed Behavior

Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges