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What Extent of Welfare Loss is Caused by the Disparity between Perceived and Scientific Risks? A Case Study of Food Irradiation

Masahide Watanabe and Yukichika Kawata

The B.E. Journal of Economic Analysis & Policy, 2017, vol. 17, issue 1, 17

Abstract: An individual perceived risk often differs from an objective risk based on the scientific evidence; risks about nuclear power generation and food technology including genetic modification and food irradiation are typical such cases. However, the extent to which welfare loss is caused by the disparity between perceived and scientific risks is unclear. Based on this gap in the literature, we conduct a discrete choice experiment to estimate the welfare loss. At the same time, we must tackle two issues arising in the estimation: endogeneity and ambiguity in the perceived risk. We construct an empirical model based on maxmin expected utility to consider ambiguity and apply a control function approach to alleviate endogeneity bias. The results show that 1) the disparity between perceived and scientific risks causes a significant welfare loss; 2) the ambiguity in the perceived risk exacerbates the welfare loss; and 3) endogeneity largely biases welfare measurement.

Keywords: ambiguity; choice experiments; endogeneity; subjective probability; maxmin expected utility (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/bejeap-2016-0071

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