De Borger, Bruno and Fosgerau, Mogens (2008): Discrete choices and the trade-off between money and time: A test of the theory of reference-dependent preferences. Published in: Journal of Urban Economics , Vol. 64, No. 1 : pp. 101-115.
This is the latest version of this item.
Download (337kB) | Preview
We formulate a model of reference-dependent preferences based on the marginal rate of substitution at the reference-point of a reference-free utility function. Using binary choices on the trade-off between money and travel time, reference-dependence is captured by value functions that are centered at the reference. The model predicts a directly testable relationship among four commonly used valuation measures (willingness to pay (WTP), willingness to accept (WTA), equivalent gain (EG) and equivalent loss (EL)). Moreover, we show that the model allows recovering the underlying ‘reference-free’ value of time. This provides a potential solution to the issue of which measure to use for public policy evaluation. Based on a large survey data set, we estimate an econometric version of the model, allowing for both observed and unobserved heterogeneity. In a series of tests of high statistical power, we find that the relationship among the four valuation measures conforms to our model and that the constraints on the parameters implied by the model are met. The gap between WTP and WTA is found to be a factor of four. Loss aversion plays an important role in explaining responses; moreover, participants are more loss averse in the time dimension than the cost dimension. We further find evidence of asymmetrically diminishing sensitivity. Finally, we show that the fraction of ´mistakes`, in the sense that participants are observed to sometimes select dominated options, varies systematically in a way consistent with the model of reference-dependence.
|Item Type:||MPRA Paper|
|Institution:||Technical University of Denmark|
|Original Title:||Discrete choices and the trade-off between money and time: A test of the theory of reference-dependent preferences|
|Keywords:||Reference-dependence; loss aversion; WTP-WTA gap; value of time|
|Subjects:||C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities
D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles
|Depositing User:||Mogens Fosgerau|
|Date Deposited:||07. Jan 2009 01:01|
|Last Modified:||14. May 2015 00:01|
Andreoni, J. 1995, "Warm-glow versus cold-prickle: The effects of positive and negative framing on cooperation in experiments", Quarterly Journal of Economics, vol. 110, pp. 1-21. Bateman, I., Kahneman, D., Munro, A., Starmer, C., & Sugden, R. 2005, "Testing competing models of loss aversion: an adversarial collaboration", Journal of Public Economics, vol. 89, no. 8, pp. 1561-1580. Bateman, I., Munro, A., Rhodes, B., Starmer, C., & Sugden, R. 1997, "A Test of the Theory of Reference-Dependent Preferences", The Quarterly Journal of Economics, vol. 112, no. 2, pp. 479-505. Bates, J. & Whelan, G. 2001, "Size and sign of Time Savings", ITS Working Paper no. 561. Beesley, M. E. 1965, "The Value of Time Spent in Travelling: Some New Evidence", Economica, vol. 32, no. 126, pp. 174-185. Bierlaire, M. 2003, BIOGEME: a free package for the estimation of discrete choice models, Proceedings of the 3rd Swiss Transport Research Conference, Monte Verità, Ascona, Switzerland. Bierlaire, M. 2005, "An introduction to Biogeme", www.epfl.ch/biogeme. Cameron, T. A. & James, M. D. 1987, "Efficient Estimation Methods for "Closed-Ended" Contingent Valuation Surveys", Review of Economics and Statistics, vol. 69, no. 2, pp. 269-276. Cantillo, V., Heydecker, B., & de Dios Ortuzar, J. 2006, "A discrete choice model incorporating thresholds for perception in attribute values", Transportation Research Part B: Methodological, vol. 40, no. 9, pp. 807-825. Cummings, R. G., Brookshire, D., & Schulze, W. D. 1986, Valuing environmental goods Rowman and Allanheld, Totowa, NJ. Diamond, P. A. & Hausman, J. A. 1994, "Contingent Valuation: Is Some Number Better than No Number?", Journal of Economic Perspectives, vol. 8, no. 4, pp. 45-64. Fosgerau, M. 2006a, "Investigating the distribution of the value of travel time savings", Transportation Research Part B: Methodological, vol. 40, no. 8, pp. 688-707. Fosgerau, M. 2006b, "Specification of a model to measure the value of travel time savings", Transportation Research Part A: Policy and Practice, vol. Forthcoming. Fosgerau, M. & Bierlaire, M. 2005, "A practical test for the choice of mixing distribution in discrete choice models", IATBR Conference 2006. Fosgerau, M., Hjort, K., & Vincent Lyk-Jensen, S. 2006, The Danish Value of Time Study - Results for Experiment 1 www.dtf.dk. Fosgerau, M. & Nielsen, S. F. 2005, "Deconvoluting preferences and errors: a semi-nonparametric model for binomial data", Econometric Society European Meeting 2006. Honoré, B. E. & Lewbel, A. 2002, "Semiparametric binary choice panel data models without strictly exogenous regressors", Econometrica, vol. 70, no. 5, pp. 2053-2063. Hultkrantz, L. & Mortazavi, R. 2001, "Anomalies in the Value of Travel-Time Changes", Journal of Transport Economics and Policy, vol. 35, no. 2, pp. 285-300. Johnson, E. J., Gächter, S., & Herrman, A. 2006, "Exploring the Nature of Loss Aversion", IZA DP, vol. 2015. Kahneman, D., Knetsch, J. L., & Thaler, R. 1990, "Experimental Tests of the Endowment Effect and the Coase Theorem", Journal of Political Economy, vol. 98, no. 6, pp. 1325-1348. Kahneman, D. & Tversky, A. 1979, "Prospect Theory: An Analysis of Decision under Risk", Econometrica, vol. 47, no. 2, pp. 263-292. Köszegi, B. & Rabin, M. 2006, "A model of reference-dependent preferences", The Quarterly Journal of Economics, vol. Forthcoming. List, J. A. 2004, "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace", Econometrica, vol. 72, no. 2, pp. 615-625. Munro, A. & Sugden, R. 2003, "On the theory of reference-dependent preferences", Journal of Economic Behavior & Organization, vol. 50, pp. 407-428. Plott, C. R. & Zeiler, K. 2005, "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations", The American Economic Review, vol. 95, no. 3, pp. 530-545. Randall, A. & Stoll, J. R. 1980, "Consumer's Surplus in Commodity Space", American Economic Review, vol. 70, no. 3, pp. 449-455. Shlomo Benartzi & Richard H.Thaler 1995, "Myopic Loss Aversion and the Equity Premium Puzzle", Quarterly Journal of Economics, vol. 110, no. 1, pp. 73-92. Stott, H. P. 2006, "Cumulative prospect theory's functional menagerie", Journal of Risk and Uncertainty, vol. 32, no. 2, pp. 101-130. Tversky, A. & Kahneman, D. 1991, "Loss Aversion in Riskless Choice: A Reference-Dependent Model", The Quarterly Journal of Economics, vol. 106, no. 4, pp. 1039-1061.
Available Versions of this Item
Discrete choices and the trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 08. Jul 2007)
The Trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 07. Sep 2007)
The Trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 14. Nov 2007 15:01)
- Discrete choices and the trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 07. Jan 2009 01:01) [Currently Displayed]
- The Trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 14. Nov 2007 15:01)
- The Trade-off between money and time: A test of the theory of reference-dependent preferences. (deposited 07. Sep 2007)