Weekly Economics Webinar by Kavita Sardana
November 11, 2020 @ 1:20 pm - 2:30 pm
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Title: Welfare Effects of Ad-hoc Truncation and Homogeneous Preferences in Estimating Demand using Travel Cost Model: An Application to the George Washington & Jefferson National Forests
Speaker: Kavita Sardana, Assistant Professor of Policy Studies, TERI School of Advanced Studies
Abstract: In previous travel cost studies, researchers have dropped visitor observations with very high -frequency trips to recreational sites who may be considered outliers. By dropping these observations, researchers truncate the distribution of visitors to the site, to create one homogeneous class of visitors, and the truncation is somewhat ad-hoc; that is, the truncation rule or threshold does not originate from theory. The distribution of trips taken to the recreational site by this homogenous group is left-side truncated at zero, and perhaps also right-side truncated by the researcher at some rather ad hoc cut-off or a threshold number of trips. There are at least two issues involved with modeling demand imposing homogeneous visitor preferences and ad-hoc, right-side truncation to the distribution of trips. First, ad-hoc truncation imposes a constraint on the estimated model which is likely different from the actual, underlying conceptual model. Second, homogenous preferences impose another constraint on the estimated model which could result in incorrect estimation of consumer surplus.
We estimate a travel cost model for the George Washington & Jefferson National Forests using an On-Site Latent Class Poisson Model. We show that the constraints of ad-hoc truncation and homogenous preferences significantly impact consumer surplus estimates derived from the on-site travel cost model. By relaxing the constraints, we show that more than one class of visitors with unique preferences exists in the population. The resulting demand functions, price responsive behaviors, and consumer surplus estimates reflect differences across these classes of visitors. With heterogeneous preferences, a group of ‘local residents’ exists with a probability of 8% and, on average take 113 visits.