Income elasticity of overnight stays over seven decades

Abstract

This article provides new evidence on the stability of the long-run income elasticity of tourism and travel demand by use of the recently developed smooth time-varying cointegration regression model. The estimations control for relative purchasing power parity of the source country and make use of a specific country dataset where domestic and foreign overnight stays are available over a longer period of time (Switzerland, 1934–2015). Results show that the income elasticity of foreign overnight stays peaks at approximately two in the early 1960s, drops to around one in the early 1980s and from then on remains stable until the end of the sample. Domestic income elasticity reaches its highest levels in the 1930s, then steadily falls towards one in the mid-1960s, and therefrom remains stable until 2015. Different phases in the tourism area life cycle might be a major explanatory factor for variation in income elasticities over time.