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Endogeneity of Risk Perceptions in Averting Behavior Models

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Abstract

This paper examines the relationship between averting expenditures / choices and perceived health risks. Models in the literature often employ risk perceptions as explanatory variables without addressing the potential endogeneity of the perceived risk. We examine the implications of ignoring endogeneity in this context, using an application to both drinking water choices and expenditures and perceived health risks. Our data are from an Internet-based cross-Canada survey that employs a novel interactive risk ladder to elicit mortality risk perceptions relating to water. We employ two fundamentally different methods to assess the impact of risk perceptions on behavior: an analysis of expenditures on alternate water sources and a model of proportional choice of water sources. Results suggest the presence of averting behavior with respect to perceived mortality risks and that the estimated effect of water risks is greater than 3 times higher when using approaches that correct for endogeneity compared to models that do not.

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Notes

  1. For example, laboratory experiments find that individuals place a higher weight on small-risk events and a lower weight on high-risk events compared to objective measures (Shaw and Woodward 2008; Ridell 2012).

  2. This event took place in the year 2000 in Walkerton, Ontario where E. coli contamination in local drinking water supplies led to total costs of nearly $65 million (Livernois 2001). Other notable water contamination events took place in 2001 in North Battleford, Saskatchewan where the presence of cryptosporidium, a parasitic organism, led to an estimated 4–7 thousand illnesses in the region (Stirling et al. 2001), and in the aboriginal community of Kashechewan, Ontario where E. coli resulted in the evacuation of the community and a total cost of over $16 million (CBC 2006). Between 1993 and 2008, at least 48 water-borne disease events were reported by public health officials in Canada (Wilson et al. 2009).

  3. An illustrative video of the risk ladder in use is provided in the online supplementary material.

  4. A much more detailed discussion of this literature is presented in Schram (2009).

  5. The survey was developed using the aid of 7 focus groups, and a pretest with follow-up calls. The pretest was implemented by Ipsos-Reid, and resulted in 128 completed surveys. Particular consideration was given to the design of the risk ladder for gathering risk perception information. The goal for the survey was 1000 respondents. In order to achieve this, 5556 invites were sent out to the Ipsos-Reid online panel. 1304 individuals completed the survey, which would indicate a response rate of 23.5%. The 4252 non-responders include those who quit the survey partway through, as well as those that did not choose to activate their survey link.

  6. The reason the census median age is lower than our sample is that it includes all Canadians whereas our sample includes only adults.

  7. When compared, for Quebec the difference in regional population between data sources is 1.45% and is overrepresented in the survey sample.

  8. In this study, the cost of tap water is treated as zero, as was done by Abrahams et al. (2000). This zero cost assumption for tap water is fairly innocuous as the marginal cost of tap water in Canada has been estimated to be around 11 cents per person per month (Dupont and Jahan 2012).

  9. Following Abdalla et al. (1992) we used 10 years or 120 months for tap attachment filters. For container style filters, which are likely to see much more wear and tear, 5 years or equivalently 60 months was considered the useful life of the product.

  10. A double-bounded binary choice scenario was presented to respondents where they chose between a receiving $100 in 1 month from now or $116 in 7 months. A follow-up question with a higher ($128) or lower ($105) monetary amount received in seven months was presented to respondents depending how they answered the first question.

  11. These rates are slightly high, however they are consistent with responses in the survey, and on average only a small decrease (less than $1.00) was noted when the same calculations were done using 10% rates for all respondents.

  12. Although there may be an implicit cost associated with this feature of a refrigerator, the cost of the appliance was not gathered in the survey. A total of 82 individuals reported themselves to be refrigerator water filter users.

  13. In some cases, individuals indicated a positive consumption amount, but did not know the costs they incurred for that consumption. These cases mostly arose in filtering expenditures, as there are many components to expenditures on filtration for which “don’t know” was a possible answer (e.g. replacement cost, replacement frequency, system cost). In the case where an individual indicated positive consumption, but did not know a specific expenditure, the average cost specific to each water alternative was used.

  14. For example, if an individual reported spending approximately $1.00 for 1% of their monthly consumption, 100% consumption would cost them approximately $100.00.

  15. We removed two observations with very high monthly bottled water costs of $5000 and $10,000. Including these two outliers, the mean and standard deviation is $119.38 and $347.85 and we used 10 standard deviations of the mean (\(\sim \)$3600) as the outlier cut-off threshold. The 1302 remaining observations have bottled water costs within 10 standard deviations of the mean.

  16. That is, each exponential decrease (ex. \(10^{-5}\) to \(10^{-6}\)) in the level of risk was given its own linear section in the risk ladder, in which the appropriate decreases (ex. 0.00045–0.00040%, a decrease of 0.00005%) were represented in a linear fashion. The “semi-logarithmic” property of the risk ladder describes the appearance of the change between each exponential section.

  17. The 90 deaths per year figure is confirmed cases based on extrapolated data from the United States and may underestimate actual numbers due to under-reporting (Edge et al. 2001).

  18. The 192 deaths are derived from a mortality rate of 20 bladder cancer deaths per 100,000 people over a 35-year period reported in the survey used by Adamowicz et al. (2011). This rate was multiplied by the 33.6 million people in Canada in 2009. The mortality rate information is based on studies by Wigle (1998) and Canadian Cancer Society’s Advisory Committee on Cancer Statistics (2015).

  19. The estimated age-standardized mortality rate for skin cancer in Canada is 2.3 per 100,000 (Canadian Cancer Society’s Advisory Committee on Cancer Statistics 2015). Applied to the 2009 Canadian population of 33.6 million, this mortality rate implies approximately 773 deaths per year from skin cancer in Canada.

  20. The ratio of the objective risk levels between skin cancer and drinking water risks is calculated using the 773 annual deaths from skin cancer and 282 estimated deaths from drinking water (192 from bladder cancer and 90 from microbial infections).

  21. The empirical model does not specify a particular value of \(\rho \), but rather the proportions represent the average drinking water consumption shares over the month. Without the reproduction of such occasions in an experimental fashion, knowledge of the number of choice occasions for drinking water that one faces in a month is difficult to obtain in a survey format. Most individuals are not likely to know how many times they drink water in each month.

  22. For example, reducing risk from 1 in 100,000,000 chance of death in a year to zero has the same effect on behavior as reducing risk from 101 in 100,000,000 to 100 in 100,000,000.

  23. Preliminary analysis using the continuous risk probability variable yields no statistically significant relationship between risks and water source choices. This can be interpreted in two ways. Either, there is no relationship or risk reductions do not have linear effects on behaviour (but may have nonlinear effects depending on the base level of risk). The advantage of using the dummy variable approach is that the nonlinearity of the effect of risk reductions can be modelled quite flexibly. One disadvantage of the dummy variable approach is choosing the appropriate threshold level between low and high levels of risk. In order to illustrate this we employ four different specifications in the paper.

  24. We chose gender, age, and language as they are the most plausible exogenous socio-demographic variables available, but cannot be assured these variables are completely endogenous. To check the robustness of the results to different socio-demographic variables, Table 9 also summarizes models using alternative socio-demographic variables. Results are similar across the different specifications.

  25. Lewbel et al. (2013) highlight that the control function approach is less robust than IV methods when the endogenous variable is not continuous and the model is nonlinear. Wooldridge (2014) provides a more in-depth theoretical explanation of the control function approach and binary endogenous variables and argues that the control function approach can be applied.

  26. The generalized residual can be computed as the derivative of the log likelihood with respect to the constant term and is equal to the inverse mills ratio for a probit model.

  27. One potential issue with the control function approach is accounting for the new distribution of errors that is induced by the residuals included in the second stage equation. One solution is to apply the log-odds transformation and estimate the model in linear form as opposed to as a logit (Blass et al. 2010). The dependent variable is now ln[\(\alpha _{ij}/(1-\alpha _{i\mathrm{j}})\)] where \(\alpha _{ij}\) is the share of consumption for individual i of alternative j. The benefit of this procedure is that the distribution of the errors around the mean doesn’t affect consistency as long as the errors have zero conditional mean. However, this approach does not work if the shares for each alternative are not strictly positive. This is, in fact, the case with our data since almost 65% of respondents do not consume any filtered water and 18% drinking tap water only.

  28. There is some potential for the price coefficient to be also endogenous. While consumers are price takers for each bottle of water or package of bottled water, they may be able to somewhat control the price-per-litre by varying the amount of bulk purchases of water which may carry a lower price per litre.

  29. Models with additional classes were considered but not justified based on the AIC/BIC criteria or had difficulties converging.

  30. Note that similar to Models 2 and 4, Model 6 uses constructed variables in the selection and expenditure equations and the standard errors of the parameter estimates will not be valid (Wooldridge 2010). Therefore, we use nonparametric bootstrap replication to calculate estimates of empirical standard errors.

  31. For the expenditure models, the estimated coefficient for Drisk1e represent the value individuals place on a reduction in tap water mortality risk level of 0.0002814%. For the choice models, we can divide the Drisk1c coefficient by the cost coefficient to derive the implied value for a reduction in general water mortality risk level of 0.0002119%.

  32. We also ran the models using a more limited sample which excluded the 5% of individuals with the highest tap water risk perceptions. Welfare measures estimated using models without these extreme individuals were generally higher by 20–40% across the different risk levels. For example, using the Drisk0 risk level and the limited sample, the VSL estimate for the multinomial logit model (Model 2) is estimated to be $10.7 million (32% higher than the full sample result) while the estimate for the latent class model (Model 4) is estimated to be $4.8 million (41% higher).

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Acknowledgements

Thanks to Shelby Gerking for comments on an earlier version of this work. We would like to thank the Canadian Water Network for financial support of the survey.

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Authors and Affiliations

  1. Department of Resource Economics and Environmental Sociology, University of Alberta, 515 General Services Building, Edmonton, AB, T6G 2H1, Canada

    Patrick Lloyd-Smith, Craig Schram & Wiktor Adamowicz

  2. Department of Economics, Brock University, 500 Glenridge Avenue, St. Catharines, ON, L2S 3A1, Canada

    Diane Dupont

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  1. Patrick Lloyd-Smith
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Correspondence to Patrick Lloyd-Smith.

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Lloyd-Smith, P., Schram, C., Adamowicz, W. et al. Endogeneity of Risk Perceptions in Averting Behavior Models. Environ Resource Econ 69, 217–246 (2018). https://doi.org/10.1007/s10640-016-0075-6

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