Edited by Nick Hanley, W. Douglass Shaw and Robert E. Wright
Chapter 13: A Finite Mixture Approach to Analyzing Income Effects in Random Utility Models: Reservoir Recreation Along the Columbia River
13. A ﬁnite mixture approach to analyzing income eﬀects in random utility models: reservoir recreation along the Columbia river J. Scott Shonkwiler and W. Douglass Shaw 1. INTRODUCTION In much applied work, for example on the beneﬁt side of cost–beneﬁt analysis, the goal is to estimate welfare measures for changes in prices or attributes of goods or activities (hereafter, ‘alternatives’). Consumption is likely to be dependent on income. Due to the nature of the alternatives, or at least the nature of data available on the consumption levels, discrete choice forms of the random utility model (RUM) have been applied to estimate the probability of choosing each alternative. Utility-theoretic welfare measures are derived from the same model. However, we are aware of only a few papers in which the authors use the RUM approach to estimate the probability of choices of goods or alternatives and assume the presence of income eﬀects or assume that there is a non-constant marginal utility of income (for example Gertler and Glewwe, 1990; Herriges and Kling, 1999). In most models, the utility function is assumed linear in its arguments, which may include prices, income, characteristics of the alternatives and the individual. For those arguments that do not change across alternatives, the argument drops out. This is a result of the fact that RUMs examine utility diﬀerences, and in the case where income enters the indirect utility function linearly, the income term has a constant eﬀect that disappears when examining...
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