Using avertive expenditures to estimate the demand for public goods: Combining objective and perceived quality

Abstract

In response to the perceived quality of a public good, households may choose to incur avertive expenditures as a substitute to its aggregate provision, thereby revealing an (inverse) demand function. When unobserved heterogeneity affects both perceived quality and avertive behavior, identification of the demand function is plagued by a problem of endogeneity. In this paper, I propose to use a first stage model of perceived quality as a function of objective quality to recover unbiased and microconsistant estimates of marginal willingness to pay for the provision of the public good. The approach can be applied when people have well-formed perceptions of the quality of the good, a prerequisite for the avertive expenditures method. I illustrate the approach with data on avertive expenditures for two qualitative aspects of household tap water networks: water hardness and aesthetic quality in terms of taste and odor.