Welfare analysis of discrete choices based on a direct utility function

Discrete choice analysis is a cornerstone of modern day transportation economics. It facilitates the analysis and prediction of individual’s transportation choices as well as the computation of welfare and willingness to pay (WTP) metrics for economic appraisal. In this paper, I develop an approach which enables the derivation of welfare and willingness to pay (WTP) measures for various specifications of the deterministic parts of a random utility specification of a discrete-choice model. Unlike previous approaches such as Small and Rosen (1981), my approach is based on a direct utility function. I can show that using this approach, I am able to derive the so-called Logsum measure and the WTP measure used for Multinomial Logit models (MNL) in a very natural way and thus much more easily, when compared to the current approach which is based on an indirect utility function. Moreover, I can show that the approach based on an indirect utility function as proposed by Small and Rosen (1981) and others is not consistent with the direct utility function foundations used in mainstream microeconomic models. I show that the assumptions concerning the impact of the income and the prices on the indirect utility function in Small and Rosen (1981) are too lax.Transport en Logistics (TLO)Technology, Policy and Managemen