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Using a Control Function to Resolve the Travel Cost Endogeneity Problem in Recreation Demand Models

Melstrom, Richard and Lupi, Frank (2012): Using a Control Function to Resolve the Travel Cost Endogeneity Problem in Recreation Demand Models.

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Abstract

This paper proposes using a control function to correct for endogeneity in recreation demand models. The control function approach is contrasted with the method of alternative specific constants (ASCs), which has been cautiously promoted in the literature. As an application, we consider the case of travel cost endogeneity in the demand for Great Lakes recreational fishing. Using data on Michigan anglers, we employ a random utility model of site choice. We show that either ASCs or the control function can correct for travel cost endogeneity, although we find that the model with ASCs produces significantly weaker results. Overall, compared with traditional approaches control functions may offer a more flexible means to eliminate endogeneity in recreation demand models.

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