Working Paper

Modelling preference heterogeneity in stated choice data: an analysis for public goods generated by agriculture



Colombo S, Hanley N & Louviere J (2008) Modelling preference heterogeneity in stated choice data: an analysis for public goods generated by agriculture. Stirling Economics Discussion Paper, 2008-28.

Stated choice models based on the random utility framework are becoming increasingly popular in the applied economics literature. The need to account for respondents’ preference heterogeneity in such models has motivated researchers in agricultural, environmental, health and transport economics to apply random parameter logit and latent class models. In most of the published literature these models incorporate heterogeneity in preferences through the systematic component of utility. An alternative approach is to investigate heterogeneity through the random component of utility, and covariance heterogeneity models are one means of doing this. In this paper we compare these alternative ways of incorporating preference heterogeneity in stated choice models and evaluate how the selection of approach affects welfare estimates in a given empirical application. We find that a Latent Class approach fits our data best but all the models perform well in terms of out-of-sample predictions. Finally, we discuss what criteria a researcher can use to decide which approach is most appropriate for a given data set.

choice experiments; covariance heterogeneity model; agri-environmental policy; landscape values; latent class model; preference heterogeneity; random parameter logit model; error component models; welfare measures

JEL codes

  • Q51: Valuation of Environmental Effects
  • Q57: Ecological Economics: Ecosystem Services; Biodiversity Conservation; Bioeconomics; Industrial Ecology
  • C52: Model Evaluation, Validation, and Selection

Title of seriesStirling Economics Discussion Paper
Number in series2008-28
Publication date online01/12/2008