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A Simple Method of Incorporating Income Effects into Logit and Nested-Logit Models: Theory and Application

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  • Anders Karlstrom

Abstract

Substantive income effects are incorporated in a logit or nested-logit model by assuming that utility is a piece-wise linear spline function of residual income. Specific income data are not required, only income by category. Expected compensating variation is easily and accurately approximated by the difference between expected maximum utility in the proposed and initial state, multiplied by the inverse of the individual's initial marginal utility of money. This approximation is almost exact because although any policy can, in theory, cause an individual to jump income categories, for most policies this probability will be very small. Copyright 2003, Oxford University Press.

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  • Anders Karlstrom, 2003. "A Simple Method of Incorporating Income Effects into Logit and Nested-Logit Models: Theory and Application," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(1), pages 248-253.
    • Handle: RePEc:oup:ajagec:v:85:y:2003:i:1:p:248-253
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    File URL: http://hdl.handle.net/10.1111/1467-8276.00116
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    10. Donna Dosman & Wiktor Adamowicz, 2006. "Combining Stated and Revealed Preference Data to Construct an Empirical Examination of Intrahousehold Bargaining," Review of Economics of the Household, Springer, vol. 4(1), pages 15-34, March.
    11. Scarpa, Riccardo & Thiene, Mara & Marangon, Francesco, 2006. "Consumer's WTP for Environment-Friendly Production Methods and Collective Reputation for Place of Origin: The Case of Val di Gresta's Carrots," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25637, International Association of Agricultural Economists.
    12. Edward Morey & Kathleen Greer Rossmann, 2003. "Using Stated-Preference Questions to Investigate Variations in Willingness to Pay for Preserving Marble Monuments: Classic Heterogeneity, Random Parameters, and Mixture Models," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 27(3), pages 215-229, November.
    13. Crastes, Romain & Beaumais, Olivier & Arkoun, Ouerdia & Laroutis, Dimitri & Mahieu, Pierre-Alexandre & Rulleau, Bénédicte & Hassani-Taibi, Salima & Barbu, Vladimir Stefan & Gaillard, David, 2014. "Erosive runoff events in the European Union: Using discrete choice experiment to assess the benefits of integrated management policies when preferences are heterogeneous," Ecological Economics, Elsevier, vol. 102(C), pages 105-112.
    14. Scarpa Riccardo & Thiene Mara & Marangon Francesco, 2007. "The Value of Collective Reputation for Environmentally-Friendly Production Methods: The Case of Val di Gresta," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 5(1), pages 1-28, September.
    15. Robert J. Johnston & Kevin J. Boyle & Wiktor (Vic) Adamowicz & Jeff Bennett & Roy Brouwer & Trudy Ann Cameron & W. Michael Hanemann & Nick Hanley & Mandy Ryan & Riccardo Scarpa & Roger Tourangeau & Ch, 2017. "Contemporary Guidance for Stated Preference Studies," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(2), pages 319-405.
    16. Yang, Jui-Chen & Pattanayak, Subhrendu K. & Jonson, F. Reed & Mansfield, Carol & van den Berg, Caroline & Jones, Kelly, 2006. "Unpackaging demand for water service quality : evidence from conjoint surveys in Sri Lanka," Policy Research Working Paper Series 3817, The World Bank.
    17. Hugo Molina, 2024. "Buyer Alliances in Vertically Related Markets," Working Papers hal-03340176, HAL.
    18. Golub, Aaron David, 2003. "Welfare Analysis of Informal Transit Services in Brazil and the Effects of Regulation," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt4z3826fg, Institute of Transportation Studies, UC Berkeley.
    19. Aaron Golub & Ronaldo Balassiano & Ayres Araújo & Eric Ferreira, 2009. "Regulation of the informal transport sector in Rio de Janeiro, Brazil: welfare impacts and policy analysis," Transportation, Springer, vol. 36(5), pages 601-616, September.
    20. Ding, Ye & Nayga Jr, Rodolfo M. & Zeng, Yinchu & Yang, Wei & Arielle Snell, Heather, 2022. "Consumers’ valuation of a live video feed in restaurant kitchens for online food delivery service," Food Policy, Elsevier, vol. 112(C).
    21. Phaneuf, Daniel J. & Smith, V. Kerry, 2006. "Recreation Demand Models," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 15, pages 671-761, Elsevier.
    22. Nahmias–Biran, Bat-hen & Shiftan, Yoram, 2016. "Towards a more equitable distribution of resources: Using activity-based models and subjective well-being measures in transport project evaluation," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 672-684.
    23. J.M.C. Santos Silva, 2004. "Deriving welfare measures in discrete choice experiments: a comment to Lancsar and Savage (2)," Health Economics, John Wiley & Sons, Ltd., vol. 13(9), pages 913-918, September.
    24. Van Loo, Ellen J. & Caputo, Vincenzina & Nayga, Rodolfo M. & Verbeke, Wim, 2014. "Consumers’ valuation of sustainability labels on meat," Food Policy, Elsevier, vol. 49(P1), pages 137-150.

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