Habit formation or word of mouth: What does lagged dependent variable in tourism demand models imply?

Abstract

The effects of habit formation/persistence (HFP) and word of mouth (WOM) each play a critical role in influencing tourists’ decisions regarding whether to visit tourism destinations and therefore tourism policies and tourism management resource allocations. Nevertheless, in previous tourism demand studies, the two effects have been represented by the same time-lagged dependent variable, which makes the variable have an ambiguous meaning and biases the empirical results. The purpose of this study is to solve the ambiguity of a lagged dependent variable in tourism demand. We used economic theories regarding internal habits and external habits to clarify the meanings of HFP and WOM and revised the tourism demand model into a spatial dynamic panel model (SDPM). The empirical results suggested that an SDPM is a more accurate model for modeling tourism demand. The effects of variables in an SDPM are more consistent with theoretical expectations.