Department of Economics

State Dependence and Long Term Site Capital in a Random Utility Model of Recreation Demand

Department of Economics
University of Delaware
Working Paper #2008-02

State Dependence and Long Term Site Capital in a Random Utility Model of Recreation Demand

<p none"="">D. Matthew Massey and George R. Parsons

ABSTRACT

Conventional discrete choice Random Utility Maximization (RUM) models of recreation demand ignore the influence of knowledge, or site capital, gained over past trips on current site choice, despite its obvious impact.  We develop a partially dynamic RUM model that incorporates a measure of site capital as an explanatory variable in an effort to address this shortcoming.  To avoid the endogeneity of past and current trip choices, we estimate an auxiliary instrumental variable regression to purge site capital of its correlation with the error terms in current site utility.  Our instrumental variable regression gives a fitted value ranging between 0 and 1 for each alternative for each person – a prediction of whether or not a person visited a site.  Results suggest that the presence of accumulated site capital is an important predictor of current trips, and that failure to account for site capital will likely lead to underestimates of potential welfare effects.

JEL Code: Q26

Key Words: Random Utility Model; State Dependence; Non-Market Valuation

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