The economic model

In order to properly weigh up what is the best portfolio of projects in terms of social costs and benefits, the choices made by respondents must be analyzed quantitatively with econometric choice models. We use utility functions for this. In these utility functions, the effects of a portfolio are multiplied by so-called taste parameters. The taste parameters indicate the extent to which the Dutch derive usefulness from the characteristics of the projects about which respondents in the Participative Value Evaluation have been given explicit information for each project. For example, for each project they could choose from, respondents were given information about the total cost of the project, but also about the impact of the project on flood protection.

We use utility functions for this. In these utility functions, the effects of a portfolio are 'multiplied' by so-called taste parameters. The taste parameters indicate the extent to which the Dutch derive usefulness from the characteristics of the projects about which respondents in the Participative Value Evaluation have been given explicit information for each project. For each project they could choose, respondents received information about the total costs of the project, but also about the influence of the project on the number of road deaths or serious injuries.

As stated, respondents do not only look at the characteristics of the projects for which a taste parameter has been estimated. For each project, a taste parameter was therefore estimated for the project-specific preferences of the respondents. The project-specific taste parameter shows how much benefit respondents derive from the project, regardless of the level of the characteristics of the alternatives included in the experiment.

The econometric model we use looks for the flavor parameters that best describe portfolio choices. Click on this link to find more information about this model.

Respondents do not only look at the characteristics of the projects for which a taste parameter has been estimated. It follows from the qualitative motivations that they also take other aspects into account. Respondents, for example, opt for the combination of dyke improvement and river widening, because they believe that this leads to a more beautiful and attractive living environment. For each project, a taste parameter was therefore estimated for the project-specific preferences of the respondents. The project-specific taste parameter indicates how much benefit the Dutch derive from the project, regardless of the level of the characteristics of the alternatives included in the experiment.

The econometric model we use looks for the flavor parameters that best describe portfolio choices. The costs and benefits of a portfolio can thus be expressed in utility units. This gives the opportunity to determine what the best portfolios are. The model that statistically best determines the social costs and benefits of the investment options is an extension of the so-called multiple discrete-continuous extreme value model (MDCEV). This new model assumes that respondents make both a continuous choice with regard to the allocation of the budget ('how much budget do I allocate'?) and make a discrete choice ('Do I include a project in the portfolio or not'?). The model takes into account that continuous choice and discrete choice are related: if respondents find many projects attractive, they will be inclined to spend as much budget as possible and vice versa.

Based on these analyses, it is therefore possible to determine the portfolio of projects that yield the greatest social value.

More information about the economic model can be found in the (Dutch) achtergrondrapport van de Participatieve Waarde Evaluatie voor de Lange Termijn Ambitie Rivieren and the publication “The Economics of Participatory Value Evaluation”.

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