Tourism, Security and Safety From Theory to Practice

Econometric Estimates
Demand Estimates
Demands and supplies from equations (1) through (4) were estimated in linear
form using two-stage least squares and employing monthly data from March 1991
through December 1999 (EViews, 1994). Parameter estimates are given in Table 1
and the corresponding elasticities at sample means in Table 2. With the exception
of a single seasonal dummy, all coefficient estimates in the Israeli demand equa-
tion are significant at the 10% level and have the expected sign. As Israeli hotels
reduce prices, as overseas hotels that Israelis patronize raise prices, or as Israeli
incomes rise, Israelis demand more local hotel space. The proportionate impact of
Israeli hotel prices on Israeli demand is mild. The own-price elasticity averages
only 
−
0.63 (column 4, Table 2), ranging from 
−
0.32 in midsummer to 
−
0.94 in
winter (Table 3). The cross-price elasticity in Table 2 is 1.00, implying a 10%
increase in travel costs outside Israel boosts local demand in Israel by 10%.
Income elasticity of demand is 1.3, suggesting Israelis regard hotel stays as a lux-
ury. Local demand (column 4, Table 1) is lowest in the winter, highest in midsum-
mer, and moderate in late spring and early autumn.
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War, Terror, and the Tourism Market in Israel
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Table 1
Bed Night Supply and Demand Estimates, Israel, 1987–1999
PL
t
s
PF
t
s
QL
t
d
QF
t
d
Constant
20.84
−
2.43
−
975
291
(4.20)
(5.01)
(448)
(506)
PL
t
−
1
0.042
(0.080)
QL
t
−
0.026
(0.003)
QF
t
0.013
0.016
(0.004)
(0.004)
QT
t
0.002
(0.002)
W
t
0.045
0.014
(0.008)
(0.005)
PF
t
−
1
0.611
(0.070)
PL
t
−
4.310
(1.570)
GNPL
t
0.050
(0.007)
SCL
t
0.390
(0.200)
S
1
43.3
375.7 
(22.5)
(54.0)
S
2
146.0
280.3 
(26.8)
(59.0)
S
3
460.0
216.5 
(35.9)
(52.0)
S
4
169.8
161.9 
(25.6)
(45.9)
S
5
40.9
138.9 
(28.2)
(51.2)
PF
t
−
22.300 
(4.490)
GNPF
t
0.001 
(0.0002)
SCF
t
−
2.130 
(1.200)
TER
t
−
2
−
12.400 
(6.000)
R
2
0.78
0.57
0.89
0.46
N
94
94
94
94
Notes:
S
1
= 1 if March or April, S
2
= 1 if May or June, S
3
= 1 if July or August, S
4
= 1 if September or October,
S
5
= 1 if November, zero otherwise. The deleted (base) season S
6 
= 1 if December, January, or February, zero
otherwise. Numbers in parentheses are standard errors.
Coefficient estimates in the foreign demand equation (column 5, Table 1) likewise
are significant at the 10% level. As one would anticipate, falling bed night prices in
Israel, or rising incomes in nations from which Israel draws tourists, increase the for-
eign demand for Israeli hotel space. Own-price elasticities are substantially higher
than in the local market, averaging 
−
2.0 (Table 2) and remaining remarkably constant
throughout the year (Table 3). On average, a 10% cut in the room price boosts foreign
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tourism in Israel by 20%. That foreign demand is more elastic than local demand
should come as no surprise. To an Israeli, the alternative to an Israeli hotel stay is to
go overseas, requiring a passport, plane flight, and exposure to foreign language and
culture. In contrast, the international tourist considering alternatives to Israel com-
pares one overseas destination with another. For European tourists in particular, many
of these alternative sites are as close to home as Israel is.
Income elasticity in the foreign demand equation (column 5, Table 2) is
extremely low: at sample mean, a 10% rise in foreign incomes lifts foreign tourism
demand in Israel by only 0.35%. Unexpectedly, foreign demand at Israeli hotels
declines as expenses rise at the non-Israeli sites which foreigners frequent. The
implication that, in the international tourist’s mind, Israeli sites are Marshallian
complements rather than substitutes for non-Israeli sites seems unaccountable and
may only reflect errors in the construction of this rather complex variable.
Seasonal dummies indicate that international tourism demand is lowest in the win-
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