Revisiting cost vector effects in discrete choice experiments

Abstract

The estimation of marginal utility of income in discrete choice experiments is of crucial importance for the estimation of willingness to pay (WTP) and welfare estimates. Despite this central importance, there are only few investigations into the impact of the design of the cost attribute vector on choices and WTP estimates. We present a conceptual framework that describes why cost vector effects might occur in choice experiments, and investigate cost vector effects empirically drawing on data from a choice experiment in the context of peatland restoration in Scotland. This study employs a split sample approach with three different cost vectors that vary considerably in the cost levels offered to respondents, and investigates differences between treatments with respect to marginal WTP estimates, status quo choice, use of systematic decision strategies and attribute non-attendance. A key finding is that the choice of cost vectors can affect the incidence of decision strategies. After accounting for the differential use of a decision strategy that might not be consistent with random utility modelling, cost vectors that are higher in magnitude result in higher WTP, in line with an anchoring hypothesis. We find weak support that marginal WTP of lower income respondents is affected differently compared to higher income respondents through the use of different cost vectors. Differences in welfare estimates resulting from the use of different cost vectors might change outcomes of cost-benefit analyses. We therefore recommend that researchers include tests of sensitivity of welfare estimates to different cost vectors in their study design.