International Choice Modelling Conference, International Choice Modelling Conference 2017

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Stochastic frontier estimation of holiday budgets for Multiple Discrete-Continuous Extreme Value model: An application to tourist expenditure analysis
Andrea Pellegrini, Igor Sarman, Stefano Scagnolari

Last modified: 28 March 2017


Understanding the dynamics of visitor expenditures represents one of the main strengths that a tourist destination may hold and this is particularly true considering the evolution of the tourism industry characterized by cheap flights, do-it-yourself experience and sharing of information and experiences on social media.

Traditional analyses on this subject focus on two approaches: the first one does not distinguish among expenditure categories; in the second case, when this distinction is considered, the approach only focuses on one particular category at a time. In both cases, the interrelated decisions that lead individuals to choose on which activity/product to allocate their budget and how much to spend for each activity/product is not recognized and may lead to partial or wrong conclusions.

Given that tourists take multiple, non-mutually exclusive decisions of expenditure allocation, we implement a Multiple Discrete-Continuous Extreme Value (MDCEV) model to understand tourist expenditure behavior. Specifically, we propose an empirical framework able to model simultaneously both the tourists’ decisions to distribute their expenditures on different activities and products and the amount of money spent on each category of expenditure. We contribute to the existing literature by deploying a stochastic frontier approach to estimate holiday budgets for the MDCEV model. This approach is essential when the underlying money budgets addressing a situation choice are unobserved, but the expenditures on the choice alternatives of interest are observed. The MDCEV only allows for a reallocation of the observed total expenditure without dealing with changes in the total level of expenditure. We extend this model with the stochastic frontier approach, which allows us to identify a latent budget frontier, representing the maximum expenditure level which tourists are willing to incur.

Our consumption analysis follows a two-stage design: firstly we estimate the latent holiday budget with a stochastic frontier regression model; secondly, we model the choice of how to allocate the total budget among the various categories of the known expenditure and the unknown expenditures (outside good), which is computed as the difference between the latent budget and the observed expenditures.

The data collection comprises the tourist expenditure categories as well as the type of the travel and the socio-demographic characteristics of traveler conducted in 2012 in the Canton Ticino, Switzerland. The expenditure information collected in the survey is used to determine nine different expenditure categories – accommodation, transportation (e.g. fuel, public transport tickets, rental car cost), purchase of souvenirs, clothes and accessories, boat trip, events, sport activities, mountain transportation (e.g. funicular railway, cable railway) , food & beverage and other.

We find 282 eligible tourists present in at least one of the expenditure categories. The vast majority of respondents are men (70%) and the average age is around 47 years. 54% choose to get to their destination in Canton Ticino by private transportation, which includes car, rental car and camper whereas 46% decides for a public service such as airplane, taxi, bus and train. On average, tourists in the sample spend in 4.5 expenditure categories; 18% allocate their budget in three expenditure categories, 32% in four categories and 44% in at least five categories. The majority of them spend on accommodation and food & beverage categories, followed by transportation, purchase of souvenirs, clothes and accessories, mountain transportation, boat trip, sport activities, events and other. This calls for the use of the multiple discrete-continuous modelling approach for modelling tourist expenditure behavior.

All satiation parameters are significantly different from one, implying that tourist decisions on how to allocate their budget simultaneously consider different categories of expenditure. The results indicate that tourists have a higher propensity to allocate their budget to purchase souvenirs, clothes, accessories and food & beverages rather than spending their money on sport activities and mountain transportation. Among the household sociodemographic characteristics, the estimates show that households with several adults are more likely to allocate budget to sport activities and events compared to households with few adults. This might be due to an increased opportunity for joint recreational activities, such as, walking, skiing or participating to an event with other adults. As we expected, the estimates related to the duration of the journey indicate that as the number of nights at destination increases so does the probability of allocating a larger portion of budget to accommodation, transportation and food & beverage categories. The purpose of trip results to be statistically significant for both discrete and continuous stage of the model. Specifically, tourists who travel for a holiday trip are less inclined to spend money on accommodation than those who travel for business.

In conclusion, our general aim is to enhance our understanding of tourist expenditure behavior by overcoming the above limitations of the MDCEV model. In particular, the empirical results demonstrate the importance of estimating a latent budget through the application of the stochastic frontier regression. Such approach could be applied to estimate budgets for many empirical applications involving MDCEV choice analysis, including travel mode choice and usage, or tourist activities and time. Furthermore, since the individual preferences on tourist activities are not considered in the current research, it would be interesting to include them by developing an integrated choice and latent variable model with a multiple discrete continuous choice approach. In terms of policy implications, our findings provide evidences about the determinants driving tourist budget allocation. A tourist destination might design suitable packages for specific tourist segments by combining, for example, transportation and accommodation, or accommodation and activities in order to incentivize them to spend a larger part of their holiday budget. Finally, a broader knowledge on tourist expenditure behavior could also guide tourist destinations in marketing and promotion activities for specific expenditure categories.

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