Latent Value Estimation in Contingent Valuation
Abstract
This paper explores the concept of a latent value of a commodity not normally traded in the market in the context of contingent valuation. The seller’s willingness to accept compensation (WTA) is assumed to be a linear mix of unknown independent signals consisting of the latent value (P) of the commodity and an adjustment factor (F). Similarly, the buyer’s willingness to pay (WTP) is assumed to be an independent mix of these two unobservable signals. The two unknown independent signals are estimated by Independent Component Analysis (ICA) and by Factor Analysis methods. Knowledge of the latent value and adjustment factor aids in the negotiation process in contingent valuation in environmental economics.
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