Biases in Willingness-to-Pay Measures from Multinomial Logit Estimates Due to Unobserved Heterogeneity

Tinbergen Institute Discussion Paper 10-014/3

15 Pages Posted: 22 Jan 2010

See all articles by Vincent A.C. van den Berg

Vincent A.C. van den Berg

VU University Amsterdam; Tinbergen Institute

Eric Kroes

affiliation not provided to SSRN

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: January 21, 2010

Abstract

It is a common finding in empirical discrete choice studies that the estimated mean relative values of the coefficients (i.e. WTP's) from multinomial logit (MNL) estimations differ from those calculated using mixed logit estimations, where the mixed logit has the better statistical fit. It is, however, less clear under exactly what circumstances such differences arise, whether they are important, and if they can be seen as biases in the WTP estimates from MNL. We use datasets created by Monte Carlo simulation to test, in a controlled environment, the effects of the different possible sources of bias on the accuracy of WTP's estimated by MNL. Consistent with earlier research we find that random unobserved heterogeneity in the marginal utilities does not in itself biases the MNL estimates. Furthermore, whether or not the unobserved heterogeneity is symmetrically shaped also does not affect the accuracy of the WTP estimates of MNL. However, we find that if two heterogeneous marginal utilities are correlated then the WTP's from MNL may be biased. If the correlation between the marginal utilities is negative, then the bias in the MNL estimate is negative, whereas if the correlation is positive the bias is positive.

Keywords: Discrete Choice, Biases in WTP's, Multinomial Logit, Correlated Heterogeneous Marginal Utilities

JEL Classification: C13, C25

Suggested Citation

van den Berg, Vincent A.C. and Kroes, Eric and Verhoef, Erik T., Biases in Willingness-to-Pay Measures from Multinomial Logit Estimates Due to Unobserved Heterogeneity (January 21, 2010). Tinbergen Institute Discussion Paper 10-014/3, Available at SSRN: https://ssrn.com/abstract=1539880 or http://dx.doi.org/10.2139/ssrn.1539880

Vincent A.C. van den Berg (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

HOME PAGE: http://www.feweb.vu.nl/nl/afdelingen-en-instituten/spatial-economics/staff/v-berg/index.asp

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Eric Kroes

affiliation not provided to SSRN ( email )

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 020 4446094 (Phone)
+31 020 4446004 (Fax)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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