The Opportunity Cost of Travel Time as a Noisy Wage Fraction

Few issues are more important to welfare estimation with recreation demand models than the specification of the opportunity cost of travel time. The two most common approaches to specifying this cost treat it as a fixed fraction of the recreationist's wage, and either estimate the fraction (done infrequently) or assume it takes some value (done commonly), with references to results from the commute time literature used to justify the latter. However, these approaches lack firm conceptual rationales, and the consequences of using them are not fully understood. Recognizing that information limitations often preclude more general approaches, we use a joint recreation travel‐labor supply model to show that under relatively modest assumptions the opportunity cost of travel time can be expressed as a wage fraction with noise. This formulation is straightforward to implement as part of random parameters‐based recreation demand models. We then evaluate the welfare consequences of using the two approaches noted above, which are special cases of the noisy wage fraction specification. Our results suggest that the more critical restriction to relax in opportunity cost of travel time specifications is the absence of noise, rather than the specific level of the wage fraction.