Published in:
Publication year: 2007
This paper extends the linear utility model commonly used for estimating the willingness to pay for non-market goods to a non-linear model with decreasing marginal utility. The proposed approach relaxes the assumption of constant rate of substitution between income and non-market commodities, an assumption which can be especially restrictive in cases when the non-market good is a luxury commodity or a new good whose benefits are not completely known. The adopted non-linear formulation can therefore accommodate risk-averse behavior with respect to nonmarket goods particularly when the non-market attributes are measured by discrete variables. The proposed models have been applied to data from a choice experiment for energy efficiency measures in apartment buildings. The econometric specification is based on a fixed-effect logit model. The results suggest that ignoring consumers’ risk-aversion toward new non-market goods could lead to an underestimation of the marginal willingness to pay. However, consistent with previous studies the non-linear effect of income does not have a considerable effect on the estimation results.
This paper extends the linear utility model commonly used for estimating the willingness to pay for non-market goods to a non-linear model with decreasing marginal utility. The proposed approach relaxes the assumption of constant rate of substitution between income and non-market commodities, an assumption which can be especially restrictive in cases when the non-market good is a luxury commodity or a new good whose benefits are not completely known. The adopted non-linear formulation can therefore accommodate risk-averse behavior with respect to nonmarket goods particularly when the non-market attributes are measured by discrete variables. The proposed models have been applied to data from a choice experiment for energy efficiency measures in apartment buildings. The econometric specification is based on a fixed-effect logit model. The results suggest that ignoring consumers’ risk-aversion toward new non-market goods could lead to an underestimation of the marginal willingness to pay. However, consistent with previous studies the non-linear effect of income does not have a considerable effect on the estimation results.