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Welfare with Imperfect Foreknowledge: The Case of Risk Aversion

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Listed:
  • Jorge Holzer
  • Kenneth McConnell

Abstract

We study the use of discrete choice models in the context of recreation when there may be discrepancy between the anticipated (ex ante) and the experienced quality of site attributes due to imperfect information. Unlike previous literature on the topic, we relax the assumption of risk neutrality. Adopting a model with quasi-linear preferences, we characterize the disparity between ex ante and ex post utility by decomposing expected utility into a term stemming from bias in beliefs and a component representing willingness to pay for reducing uncertainty in site attributes. Our results show that ex post corrections of welfare losses are attenuated by greater dispersion in beliefs about amenities.

Suggested Citation

  • Jorge Holzer & Kenneth McConnell, 2020. "Welfare with Imperfect Foreknowledge: The Case of Risk Aversion," Land Economics, University of Wisconsin Press, vol. 96(1), pages 43-55.
    • Handle: RePEc:uwp:landec:v:96:y:2020:i:1:p:43-55
    Note: DOI: 10.3368/le.96.1.43
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    File URL: http://le.uwpress.org/cgi/reprint/96/1/43
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    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • Q26 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Recreational Aspects of Natural Resources

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