Distortions in willingness-to-pay for public goods induced by endemic distrust in institutions

Abstract

In this paper, we analyze the implications for the economic valuation of the provision of public goods, considering respondents’ perceptions of the institution(s) that provide the service. The specific behavioral mechanism whereby institutional distrust (ID) shows itself is through the activation of screening of choice options (choice set formation). However, ID-induced choice set formation might be confounded with the consumer budget constraint, especially in a developing country context, leading to biased welfare estimates for service improvement. We formulate a semi-compensatory hybrid choice set formation (SC-HCSF) model that enables us to 1) discriminate the effect of a budget constraint from that of ID-induced choice set formation and 2) characterize their separate impacts on welfare estimates using a spatial framework. We compare our model results to those from a standard Random Parameters Logit (RPL) Model. The RPL underestimates (overestimates) welfare when individuals have a low (high) ID. Based on our empirical model results, we demonstrate that the impacts of ignoring institutional trust issues can be highly deleterious to project appraisals, particularly in settings where legislative and regulatory institutions are perceived to be endemically corrupt.