Box-cox Estimation of International Tourism Demand for Nicaragua

Abstract

The objective of this research was to estimate with linear, log-linear, and Box-Cox specifications of Nicaragua tourism exports to the developing countries of Costa Rica, El Salvador, Guatemala, Honduras, and the developed country of the US. Using Zellner's seemingly unrelated regression procedure, estimates from the three approaches are compared to address: functional form selection; structure and influencing factors, such as income, relative prices, and travel costs; and identification of demand parameters, in particular elasticity values. The corresponding short-run income elasticity values range from a low of 1.5 for Costa Rica to a high of 2.21 for El Salvador with an average of 1.88. The results attest to the strength of the income effect in increasing tourist arrivals and that Nicaragua will benefit differently from income increases in the origin countries. The coefficients of the price variables have the hypothesized negative signs for all 15 countries. The short-run price elasticity values range from –0.59, the lowest value of all for Honduras, to –1.15 the largest for Guatemala. These results could indicate a moderate degree of substitutability of Nicaragua tourism for domestic tourism. With regard to the coefficients of the surface costs, in the short-run, tourists from El Salvador and Guatemala are in fact more sensitive to changes in surface costs. With respect to the US tourists we emphasize the importance of air transportation costs, with elasticity values greater than unity. The findings of this tourism disaggregated origin market approach could help policy makers and the private operating sectors tailor tourism marketing, commercialization, and promotion strategies to fit specific markets.