Showing papers on "Revealed preference published in 2007"

Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics

Abstract: This paper proposes a choice-theoretic framework for evaluating economic welfare with the following features (1) It is applicable irrespective of the positive model used to describe behavior (2) It subsumes standard welfare economics both as a special case (when standard choice axioms are satisfied) and as a limiting case (when behavioral anomalies are small) (3) It requires only data on choices (4) It is easily applied in the context of specific behavioral theories, such as the s, d model of time inconsistency, for which it has novel normative implications (5) It generates natural counterparts for the standard tools of applied welfare analysis, including compensating and equivalent variation, consumer surplus, Pareto optimality, and the contract curve, and permits a broad generalization of the first welfare theorem (6) Though not universally discerning, it lends itself to principled refinements

Consistency and heterogeneity of individual behavior under uncertainty

Abstract: By using graphical representations of simple portfolio choice problems, we generate a very rich dataset to study behavior under uncertainty at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we estimate preferences using a two-parameter utility function based on Faruk Gul (1991). This specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory. The parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population.

Modelling airport and airline choice behaviour with the use of stated preference survey data

Abstract: The majority of studies of air travel choice behavior make use of revealed preference (RP) data, generally in the form of survey data collected from departing passengers. While the use of RP data has certain methodological advantages over the use of stated preference (SP) data, major issues arise because of the often low quality of the data relating to the un-chosen alternatives, in terms of explanatory variables as well as availability. As such, studies using RP survey data often fail to recover a meaningful fare coefficient, and are generally not able to offer a treatment of the effects of airline allegiance. In this paper, we make use of SP data for airport and airline choice collected in the US in 2001. The analysis retrieves significant effects relating to factors such as airfare, access time, flight time and airline and airport allegiance, illustrating the advantages of SP data in this context. Additionally, the analysis explores the use of non-linear transforms of the explanatory variables, as well as the treatment of continuous variations in choice behavior across respondents.

Age Differences in the Value of Statistical Life: Revealed Preference Evidence

Abstract: Revealed preference evidence, especially based on wage-risk tradeoffs in the labor market, provides the primary empirical basis for analyses of the value of statistical life (VSL). This mar...

The collective model of household consumption: a nonparametric characterization

Abstract: We provide a nonparametric characterization of a general collective model for household consumption, which includes externalities and public consumption. Next, we establish testable necessary and sufficient conditions for data consistency with collective rationality that only include observed price and quantity information. These conditions have a similar structure as the generalized axiom of revealed preference for the unitary model, which is convenient from a testing point of view. In addition, we derive the minimum number of goods and observations that enable the rejection of collectively rational household behavior.

Validity of Discrete-Choice Experiments - Evidence for Health Risk Reduction

Abstract: There is growing interest in discrete-choice experiment (DCE) as a method to elicit consumers’ preferences in the health care sector. Increasingly this method is used to determine willingness to pay (WTP) for health-related goods. However, its external validity in the health care domain has not been investigated until now. This paper examines the external validity of DCE concerning the reduction of a health risk. Convergent validity is examined by comparing the value of a statistical life with other preference elicitation techniques, such as revealed preference. Criterion validity is shown by comparing WTP values derived from stated choices in the experiment with those derived from actual choices made by the same individuals. Both tests provide strong evidence in favour of external validity of the DCE method.

Understanding suburban travel demand: Flexible modelling with revealed and stated choice data

Abstract: We analyse the choice of mode in suburban corridors using nested logit specifications with revealed and stated preference data. The latter were obtained from a choice experiment between car and bus, which allowed for interactions among the main policy variables: travel cost, travel time and frequency. The experiment also included parking cost and comfort attributes. The attribute levels in the experiment were adapted to travellers’ experience using their revealed preference information. Different model specifications were tested accounting for the presence of income effect, systematic taste variation, and incorporating the effect of latent variables. We also derived willingness-to-pay measures, such as the subjective value of time, that vary among individuals as well as elasticity values. Finally, we analysed the demand response to various policy scenarios that favour public transport use by considering improvements in level-of-service, fare reductions and/or increases in parking costs. In general, demand was shown to be more sensitive to policies that penalise the private car than those improving public transport.

Expected Utility Theory

Abstract: This is a chapter for the forthcoming Handbook of Rational and Social Choice, Paul Anand, Prasanta Pattanaik, and Clemens Puppe, eds., Oxford University Press, 2008. We review classic normative expected utility theory. Our goal is to frame the subsequent chapters (which consider more modern extensions to and deviations from this classic theory) in a way that is accessible to the nonspecialist but also useful to the specialist. We start from scratch with a revealed preference approach to the existence of a utility function. We then present the mathematical structure of additive and linear utility representations and their axiomatizations, in the context of abstract choice theory and using intertemporal choice as a source of examples. We are thus able to focus on this mathematical structure without the interference of the specific interpretation and notation for decision under uncertainty. Furthermore, this approach allows us to focus on the interpretation of the axioms when we turn to decision under uncertainty.

Choice, Rationality and Welfare Measurement

Abstract: We present a method for evaluating the welfare of a decision maker, based on observed choice data. Our method can be used whether or not the observed choices are rational. We parallel the standard revealed preference theory, which does require rationality, by modeling choices "as if" they were the result of a speci…c decision making process. However, in place of the usual preference relation whose maximization induces the observations, we explain choice as arising from a compromise among a set of simultaneously-held, con‡icting preference relations. We use these preference relations as the basis to measure the decision maker’s welfare. In general our method does not yield a unique set of explanatory preferences. Thus we characterize all the explanatory combinations of preferences any one of which could generate the data. We use this set of explanations to compute bounds on welfare changes. We show that some standard results of rational choice theory can be extended to irrational decision makers. The theory can be used to explore a number of context-dependent choice patterns found in psychological experiments.

The welfare cost of means‐testing: pensioner participation in income support

Abstract: We estimate parametric and semi-parametric binary choice models of benefit take-up by British pensioners and use a revealed preference argument to infer the cash-equivalent value of disutility arising from stigma or complexity of the claims process. These implicit costs turn out to be relatively small, averaging about £3–4 per week across Income Support recipients. Using the Foster–Greer–Thorbecke measure of poverty among pensioners, we find that allowing for implicit claim costs incurred by benefit recipients raises the measured degree of poverty by not more than 13%. Copyright © 2007 John Wiley & Sons, Ltd.

Revealed preference analysis of red wine attributes using polarisation

Abstract: Purpose – The usual method of analysis of product attributes in marketing is to fit a multinomial logit model within a stated choice experiment, to determine the impact of attributes on the choice probability, which is equivalent to market share. The market share is intuitive and is based on each single choice in the study. However, revealed preference allows for a study into repeat purchase and loyalty, which can also be rich constructs for determining consumer preference.Design/methodology/approach – The authors introduce a loyalty measure, polarisation, and show results based on a wine data set of revealed preference. Polarisation is a function of the beta binomial distribution (BBD) and can also be a function of the Dirichlet multinomial distribution (DMD). The DMD provides a standardised or average loyalty effect for each attribute (such as wine variety), and the BBD an individual effect for each attribute level (such as cabernet) within the attribute. While the DMD results provide a rich “first‐pass...

Valuing Crime Control Benefits Using Stated Preference Approaches

Abstract: While the "state-of-the-art" in valuing crime control benefits has progressed considerably over the past 30 years, there is still no agreement in the literature about either the scope of benefits that should be considered or about the appropriate methodology to estimate these benefits. This chapter first considers the scope of benefits and argues that a holistic approach should consider the impact of crime on the "quality of life" in a neighborhood or city. Methodologies for estimating the quality of life can take either a "bottom up" or "top down" approach. While these are conceptually equivalent, the empirical burdens differ and neither approach is necessarily better. Regardless of which approach is taken, there are three basic methodologies that have been used to estimate nonmarket public goods such as the value of crime reductions - revealed preferences, stated preferences, and life satisfaction. We focus on ex ante stated preference approaches that are designed to estimate the impact of crime on quality of life and consider some of the key methodological challenges faced by researchers. Existing studies are reviewed and future research priorities are identified.

Improving revealed preference bounds on demand responses

Abstract: There are three key dimensions by which revealed preference bounds on consumer demand responses can be improved. The first relates to the improvements that arise from using expansion paths for given relative prices, E-bounds. The second concerns the addition of new price information. Thirdly, there are improvements due to assuming separability. Our previous research has examined the first two cases. In this article, we show how to impose separability assumptions within a fully nonparametric analysis and distinguish between weak and homothetic separability. We also apply these ideas to the analysis of demand responses using United Kingdom household level data.

Putting a value on trees: an economist's perspective

Abstract: Summary Economists try to put a monetary value on trees to aid rational decisions about scarce resources Examples exist of all the eight general methods of valuing non-market products All methods encounter problems, to do with what is valued, by whom, from what perspective; how subjectivity influences value, and how values are scaled or partitioned according to circumstance For a value which is so context-sensitive, an appropriate valuation protocol involves expertise drawing upon more than one method: expert aesthetic judgement calibrated by reference to the relevant population; choice experiments to establish a cardinal scale of value; and reference to data on population preferences revealed in house purchase and travel decisions A rough indicative valuation of amenity trees in the UK was £50 000 000 000 over a 100 year period

The collective model of household consumption: A nonparametric characterization

Abstract: We provide a nonparametric characterization of a general collective model for household consumption, which includes externalities and public consumption. Next, we establish testable necessary and sufficient conditions for data consistency with collective rationality that only include observed price and quantity information. These conditions have a similar structure as the generalized axiom of revealed preference for the unitary model, which is convenient from a testing point of view. In addition, we derive the minimum number of goods and observations that enable the rejection of collectively rational household behavior. Copyright The Econometric Society 2007.(This abstract was borrowed from another version of this item.)

Choice, Rationality and Welfare Measurement

Abstract: We present a method for evaluating the welfare of a decision maker, based on observed choice data. Unlike the standard economic theory of revealed preference, our method can be used whether or not the observed choices are rational. Paralleling the standard theory we present a model for choice such that the observations arise "as if" they were the result of a specific decision making process. However, in place of the usual preference relation whose maximization induces the observations, we explain choice as arising from a compromise among a set of simultaneously held, conflicting preference relations. As in revealed preference theory, these simultaneously held preferences are inferred from the choice data and we use them as the basis to discuss the decision maker’s welfare. In general our method does not yield a unique set of explanatory preferences and therefore we characterize all the explanatory sets of preferences. We use this set to compute bounds on welfare changes. We show that some standard results of rational choice theory can be extended to irrational decision makers. The theory can be used to explore a number of context-dependent choice patterns found in psychological experiments.

Telecommuting and residential location decisions: combined stated and revealed preferences model

Abstract: This paper reports on a combined stated preference (SP) and revealed preference (RP) model for studying the effect of telecommuting on households’ residential location decisions. Logit models were ...

Consistency, Heterogeneity, and Granularity of Individual Behavior under Uncertainty

Abstract: By using graphical representations of budget sets over bundles of state-contingent commodities, we generate a very rich data set well-suited to studying behavior under uncertainty at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we estimate preferences using a two-parameter utility function based on Faruk Gul (1991). This specification provides a good interpretation to the data at the level of the individual subject and can account for the highly heterogeneous behaviors observed in the laboratory. The parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population.

The Economics of Fish Consumption Advisories: Insights from Revealed and Stated Preference Data

Abstract: Measuring how fish consumption advisories affect angler’s utility has proven difficult. Relying on stated preference (SP) data is problematic because of hypothetical bias. Revealed preference (RP) data benefits from using actual behavior; however, co-linearity often makes it difficult to model the array of advisory severity levels across different species and catch rates. The array of advisories also makes traditional joint estimation impractical. This paper describes an alternative joint estimation technique, based on an index of SP parameter, that we used for estimating the effect of fish consumption advisories on the Fox River/Green Bay.

Bayesian Estimation of Willingness-to-pay Where Respondents Mis-report Their Preferences*

Abstract: We introduce a modified conditional logit model that takes account of uncertainty associated with mis-reporting in revealed preference experiments estimating willingness-to-pay (WTP). Like Hausman et al. [Journal of Econometrics (1988) Vol. 87, pp. 239-269], our model captures the extent and direction of uncertainty by respondents. Using a Bayesian methodology, we apply our model to a choice modelling (CM) data set examining UK consumer preferences for non-pesticide food. We compare the results of our model with the Hausman model. WTP estimates are produced for different groups of consumers and we find that modified estimates of WTP, that take account of mis-reporting, are substantially revised downwards. We find a significant proportion of respondents mis-reporting in favour of the non-pesticide option. Finally, with this data set, Bayes factors suggest that our model is preferred to the Hausman model.

Investigation and analysis of evidence of asymmetric churn in travel demand models

Abstract: There is a large amount of research work that has been devoted to the understanding of travel behaviour and for the prediction of travel demand and its management. Different types of data including stated preference and revealed preference, as well as different modelling approaches have been used to predict this. Essential to most travel demand forecasting models are the concepts of utility maximisation and equilibrium, although there have been alternative approaches for modelling travel behaviour. In this paper, the concept of asymmetric churn is discussed. That is travel behaviour should be considered as a two way process which changes over time. For example over time some travellers change their mode of travel from car to bus, but more travellers change their mode from bus to car. These changes are not equal and result in a net change in aggregate travel behaviour. Transport planners often aim at producing this effect in the opposite direction. It is important therefore to recognise the existence of churns in travel behaviour and to attempt to develop appropriate policies to target different groups of travellers with the relevant transport policies in order to improve the transport system. A data set collected from a recent large survey, which was carried out in Edinburgh is investigated to analyse the variations in departure time choice behaviour. The paper reports on the results of the investigation.

Development of a Intercity Mode Choice Models for New Aviation Technologies

Abstract: A family of nested logit random utility models was developed to study intercity mode choice behavior in the United States. The models were calibrated using a nationwide revealed preference survey (1995 American Travel Survey) and two stated preference surveys conducted by Virginia Tech at selected airports in the U.S. The focus of this paper is on the ability of the models to estimate market share for the new category of Very Light Jet aircraft used in on-demand air taxi services. Analysis was performed to compare the stated preference surveys and the American Travel Survey within the same random utility framework. The main explanatory variables in the utility functions are travel time and travel cost stratified by household income. The model has been integrated into a large-scale computer software travel demand framework called the Transportation Systems Analysis Model to estimate nationwide intercity travel demand flow between 3,091 counties in the U.S., 443 commercial service airports and more than 3,000 general aviation airports in the U.S. A pared down version of the model will be integrated into the National Strategy Simulator that the FAA uses for strategic level planning the aviation system.

Testing Consumer Theory in the Field: Private Consumption Versus Charitable Goods

Abstract: We present evidence from a natural field experiment designed to shed light on whether individual behavior is consistent with standard consumer theory. In conjunction with the Bavarian State Opera House, we mailed 22,000 regular opera attendees a letter describing a charitable fundraising project organized by the opera house. Recipients were randomly assigned into one of six treatments designed to test revealed preference theory and explore behavioral responses to price changes, income changes, and signals of the project quality as captured by the presence of a lead donor. We find that consumer behavior, on both the extensive and intensive margins, can be rationalized within a standard model of consumer choice in which individuals have preferences defined over own consumption and charitable donations received by the project, that satisfy GARP. We find no evidence that choices are motivated purely by warm glow, or that consumers target a certain amount of donations to give irrespective of the budget set faced. The analysis highlights that in a real world setting where consumers make simple decisions they are familiar with, standard microeconomic theory works well in explaining observed individual choices.

A discrete choice study to assess the impact of reliability on passenger rail demand

Abstract: A study is described of the impact of punctuality (i.e. where a train runs to time) and reliability (i.e. whether a train runs at all) on passengerrail demand, funded by the UK Department for Transport. This study aspires to place emphasis on actual (i.e. revealed and reported) behaviour, and to obtain direct estimates of the effects of changes in travel time variability on rail demand. Econometric analysis of rail ticket sales data has made a major contribution to understanding rail demand, and there is no reason in principle why this method cannot also yield insights into the demand impacts of train punctuality and reliability. Naturally, any such analysis might yield particular insights when applied to routes and periods thathave been subject to travel time variability. Acknowledging this, a meeting was convened with industry representatives for purposes of identifying potential study contexts. Guided by this consultation, a sample of 240 origin-destination pairs (480 single flows) on a 13-period basis from 1996 until the present was developed to form the basis for an econometric analysis. This analysis is supported by data from various sources; principally LENNON ticket sales data, generalised journey times from MOIRA and performance data directly from train operating companies (TOCs); and will exploit panel data methods. Whilst the econometric analysis is couched in terms of some notion of the aggregate, disaggregate analysis permits more detailed consideration of the agents that comprise the market. In the present case,disaggregate analysis offers a means of revealing travellers' attitudes to risk and monetary valuations of punctuality and reliability. It was decided at the outset of the project that disaggregate analysis might usefullycombine three elements: retrospective questioning, revealed preference (RP), and stated preference (SP). A passenger questionnaire appealing to both characteristics was produced. In order to mitigate the risks of relying entirely on revealed and reported preferences, a final component of the questionnaire was SP. The analysis of the data is described. For the covering abstract see ITRD E137145.

On the theoretical valuation of marginal business travel time savings

Abstract: The purpose of this paper is to theoretically derive a measure of the medium (or long) run social benefit from a marginal travel time saving for longer (at least one day) business trips. In the applied literature, two different approaches have been suggested. In the so-called Hensher approach, a weighted average of the wage-rate and the valuation of leisure time is used. In the so-called wage-plus (or cost-saving approach), the wage rate, plus labour-related overhead, is used. While the weighted average (Hensher) approach is intuitive for valuation of short-run effects, the wage-plus approach as such is theoretically justifiable only under very restrictive assumptions. In this paper we relax a number of these restrictions. In particular, we allow for different marginal productivities at the normal workplace and at the destination. We also explicitly model the monetary travel cost of the business trip and allow that the business trips and commuting trips, as defined, take place on separate days. On the margin, the employees working hours are allocated to the business trip destination as long as the marginal benefit exceeds the marginal cost. The derived formula may be viewed as a simple modification of the wage-plus approach, given the assumption that the direct disutility of travel and working (at the normal workplace) is equal. Under these assumptions, the wage-rate is a lower bound for VTTS, and will only be correct if the business trip has the same travel cost in time and money as the normal commuting trip. We also discuss how to find an estimate of the valuation if this simplifying assumption does not hold. Using stated preference and revealed preference data, we show that the formulas predictions regarding how the value of time should vary with travel time, travel cost, income etc. are confirmed. For example, the formula predicts that the value of time should increase not only with income, but also with increasing travel time and travel cost. This is confirmed by estimating the value of time on two separate data sets. Intuitively speaking, this is because accepting high travel times and travel costs is a signal of high productivity at the destination and hence, the value of a time saving (which can be used to stay longer at the destination of make more trips to it) should be higher. As a contrast, the wage-plus approach only relates the value of time to income (and various overhead costs). For the covering abstract see ITRD E137145.

Spanish Wine Consumer Behaviour: A Stated and Revealed Preferences Analysis

Abstract: Overall wine consumption in Spain is decreasing while, at the same time, Designation of Origin (DO) wine consumption is increasing gradually This study examines Spanish DO wine consumer behaviour through stated preferences (SP) and revealed preferences (RP) data Part-worth utilities are calculated and results from both analyses are compared to look for similarities and differences between what respondents say on surveys and what they really do on real purchases Consumer segmentation is undertaken based on purchase frequencies In a second step, we try to pool the two data sources in order to get more meaningful and robust results Results indicate similarities in the consumer choice process when comparing the two data sources, especially for the preference of the DO and wine aging attributes The only difference detected is the price variable, where a concave price-utility function is obtained with the SP analysis and a negative linear price coefficient is obtained with the RP analysis Likelihood ratio statistic indicates that equal parameters hypothesis is rejected, meaning that it is not possible to merge the two data sources This is mainly due to the difference on consumers price perception which could be explained by the different purchase occasion selected in each case