The role of income in discrete choice models. Its importance in evaluation projects
Abstract
Research on discrete choice models based on microeconomic principles has developed a framework for the detection of the income effect to estimate demands or even the measurement of well-being with special emphasis on the transport sector. However, these theoretical investigations have not been used frequently in the practice of evaluation projects. The aggregation of benefits between individuals requires sophisticated tools to avoid an erroneous specification of income in the models. The latter can potentially distort the results and inadvertently lead to suboptimal decisions that becomes critical in large investments.
This document seeks to highlight the importance of considering the effect of income in evaluation projects. For this purpose, on the basis of the discrete choice theory, several models have been tested using multinomial logit models. The data set collected comes from an urban transport survey of Metropolitan Lima in 2004. The models have tried to detect the presence of the income effect, thus assuming an income level. It has been found that the people surveyed in the study can be statistically classified into two representative income groups. Then, following Jara-Díaz and Videla (1989), it shows that the marginal utility of income decreases with income and these are statistically different when they are calculated between groups.
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References
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