STATISTICAL APPROACHES TO THE FAT TAIL PROBLEM FOR DICHOTOMOUS CHOICE CONTINGENT VALUATION

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. (JEL Q21)