Statistical Approaches to the Fat Tail Problem for Dichotomous Choice Contingent Valuation

Richard Ready and Dayuan Hu

Land Economics, 1995, vol. 71, issue 4, 491-499

Abstract: If a cumulative density function estimated from dichotomous choice data has an unrealistically fat right-hand tail, mean willingness to pay (WTP) will be overestimated. Truncating the range of integration results in a lower-bound estimate of the true mean WTP. A normalization procedure proposed by Boyle, Welsh, and Bishop (1988) unnecessarily depresses the estimate further. A new statistical approach is presented that allows a best-guess estimate of mean WTP. Because this estimate involves extrapolation beyond the range of the data, it tends to be highly variable.

Date: 1995
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