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The effects of non-constant marginal utility of cost for public goods valuation

Summary/Abstract: The paper investigates the importance of the so called ‘cost damping’ effect, understood as decreasing (in absolute terms) marginal utility of cost incurred by consumers. The effect was observed in many empirical studies applying discrete choice models, however, its presence is difficult to justify in the light of neoclassical economic theory. It has been proposed that cost damping can occur due to model mis-specification in the form of not accounting for preference heterogeneity. My analysis suggest otherwise – although the strength of the effect differs with respect to the assumptions regarding the functional form of the distribution of preferences in the population, the effect itself remains statistically significant. The analysis was conducted in the context of preferences regarding public forests management programs in Poland.

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