Comparing the Conditional Logit Estimates and True Parameters under Preference Heterogeneity: A Simulated Discrete Choice Experiment

Maksat Jumamyradov (), Benjamin M. Craig, Murat Munkin and William Greene
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Maksat Jumamyradov: Department of Economics, University of South Florida, Tampa, FL 33620, USA
Benjamin M. Craig: Department of Economics, University of South Florida, Tampa, FL 33620, USA
William Greene: Department of Economics, University of South Florida, Tampa, FL 33620, USA

Econometrics, 2023, vol. 11, issue 1, 1-13

Abstract: Health preference research (HPR) is the subfield of health economics dedicated to understanding the value of health and health-related objects using observational or experimental methods. In a discrete choice experiment (DCE), the utility of objects in a choice set may differ systematically between persons due to interpersonal heterogeneity (e.g., brand-name medication, generic medication, no medication). To allow for interpersonal heterogeneity, choice probabilities may be described using logit functions with fixed individual-specific parameters. However, in practice, a study team may ignore heterogeneity in health preferences and estimate a conditional logit (CL) model. In this simulation study, we examine the effects of omitted variance and correlations (i.e., omitted heterogeneity) in logit parameters on the estimation of the coefficients, willingness to pay (WTP), and choice predictions. The simulated DCE results show that CL estimates may have been biased depending on the structure of the heterogeneity that we used in the data generation process. We also found that these biases in the coefficients led to a substantial difference in the true and estimated WTP (i.e., up to 20%). We further found that CL and true choice probabilities were similar to each other (i.e., difference was less than 0.08) regardless of the underlying structure. The results imply that, under preference heterogeneity, CL estimates may differ from their true means, and these differences can have substantive effects on the WTP estimates. More specifically, CL WTP estimates may be underestimated due to interpersonal heterogeneity, and a failure to recognize this bias in HPR indirectly underestimates the value of treatment, substantially reducing quality of care. These findings have important implications in health economics because CL remains widely used in practice.

Keywords: conditional logit; discrete choice experiments; preference heterogeneity (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2023
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