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The New Economics of Outdoor Recreation

Edited by Nick Hanley, W. Douglass Shaw and Robert E. Wright

This innovative book presents a series of up-to-date analyses of the economics of outdoor recreation. The distinguished group of authors covers real-world recreation management issues and applies economic understanding to these problems. An extensive introduction by the editors details the historical background of economists’ interests in this subject, and reveals how economics can provide practical insights into improving how we manage our natural recreation areas.
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Chapter 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


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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