Valuation 5: The Contingent Valuation Method

1. Valuation 5: The Contingent Valuation Method • Direct and indirect valuation methods • Total economic value revised • History of CVM • Welfare measures with the CVM • CVM study design • Validity, reliability, biases • Example: Seoul water

2. Last week • Why econometrics? • What are the tasks? • Specification and estimation • Hypotheses testing • Example study

3. Direct & Indirect Valuation • Direct methods • Constructed markets • Contingent valuation method (CVM) • Choice modelling • Stated preference methods • Indirect methods • Surrogate market • Hedonic pricing • Travel cost • Revealed preference methods

4. Source: www.evri.ec.gc.ca

5. Source: www.evri.ec.gc.ca

6. Future direct & indirect use values Value of leaving use- and non-use values for future generations Value of knowledge of continued existence Direct consumption Functional benefits • Ecological • functions • Flood control • Storm protection • Biodiversity • Conserved • habitats • Habitats • Irreversible • changes • Habitats • Endangered • species • Food • Biomass • Recreation • Health Values decreasingly tangible Total Economic Value of Nature Goods & Services Use Values Non-Use Values Direct Use Values Indirect Use Values Option Values Bequest Values Existence Values

7. Non-Use Values Use Values Future direct & indirect use values Value of leaving use- and non-use values for future generations Value of knowledge of continued existence Direct consumption Functional benefits • Ecological • functions • Flood control • Storm protection • Biodiversity • Conserved • habitats • Habitats • Irreversible • changes • Habitats • Endangered • species • Food • Biomass • Recreation • Health Values decreasingly tangible Alternative definition of TEV Direct Use Values Indirect Use Values Option Values Bequest Values Existence Values

8. Classifications of TEV • TEV of an environmental good and service to an individual can be classified according to • the user (use by self – use by others or not used at all) • the use (use by self or others - never used by anybody) • the time of use etc. • How does this correspond to the classification of direct and indirect valuation?

9. Contingent valuation • Revealed preference methods can only estimate the use value of the environment, and only if that value affects behaviour in a measurable and interpretable manner • For the rest, we have to use either hypothetical markets or experimental markets (together: constructed) • Experimental markets have delivered little estimates (but a lot of insights), so the contingent valuation method remains – this is a stated preference method

10. Contingent valuation (2) • Interview people, ask them for their WTP or WTA for the environmental amenity of interest • Advantage: Applicable to more than direct use value • Disadvantage: Hypothetical, people are unfamiliar with the situation, all sorts of biases may occur, interview design is always hard

11. History • First applications in early 1960s to value outdoor recreation • 1979 the Water Resource Council recommended CV as one of 3 methods to determine project benefits • In the mid 1970s the EPA funded a research program to determine the promise and problems of the method • The Reagan Executive Order 12291 (1981) • All federal regulations on environmental policy should be submitted to a Cost-Benefit Analysis • 1989 governmental decision on legitimacy of non-use values for TEV and equal standing • 1989 Exxon Valdez oil spill • value loss of non-use values for US citizens

12. Theoretical foundation • Constructed markets can directly obtain WTP or WTA, the preferred Hicksian welfare measures • Other techniques obtain measures of the Marshallian consumer surplus • Consider an improvement in environmental quality and the WTP for it • Respondent gives the difference between the two expenditure functions • WTP is defined as the difference between the two terms

13. Estimating WTP and WTA • For n respondents this produces a set of welfare measures Wi(i=1,…,i,…,n) where Wi is either WTP or WTA • Estimating the WTP or WTA amount • Based on sample mean for W • Based on sample median for W • Based on a-trimmed mean estimators with a=0.05 or a=0.10 • Regress responses on income and other socio-economic characteristics to obtain a bid function • Aggregate across the total population to derive the total value figure

14. WTP vs WTA • People view gains and losses differently • WTP is limited to an individual‘s income • WTAC is unbounded • Confirmed by empirical studies, but not uncontested • Implies that surveys, policies need to be carefully designed • If an individual has the legal right, WTAC is the appropriate concept • It can be difficult to determine property rights (public goods) • Sometimes the current allocation is taken as the legal entitlement • Improvements = WTP and reductions = WTAC

15. Design a CV study • Define a market scenario • Choose an elicitation method • Design market administration • Design sampling • Design of experiment • Estimate WTP-function

16. Define market scenario • What is being valued? A day at the beach, a view of the beach? Pollution of a single beach, or all beaches? • What is being valued is a policy intervention or a change in pollution – these have to be plausible and comprehensible • What is the payment vehicle? A tax, an entrance fee, a levy on parking – note that people have opinions on these

17. Choose elicitation method • Direct question: How much are you willing to pay? • Bidding game: Are you willing to pay X? If yes, X+d? If no, X-d? • Payment card: Choose from a list of numbers, including comparisons • Referendum choice: Are you willing to pay X? for different X, to many people • (Note: we are looking for the maximum amount)

18. Example: Payment card Source: R.T. Carson (1991)

19. Administration & Sample • Mail: No feedback or clarification possible • Telephone: Has to be simple and short, no graphical material • In-person: Expensive, interviewer bias • Are the people approached a representative sample? And those who answered? Does the survey itself induce a bias, for example, in knowledge?

20. Experiment & Estimation • If one hypothesizes a relationship between WTP and income, then the suggested values (payment card, bidding game, referendum) have to be independent of income • If one hypothesizes a relationship between WTP and political colour, then one should include a question about the interviewees political opinions • But sample sizes need to be small, and interviews short!

21. Validity • Content (face) validity: Does what is measured and what is supposed to be measured coincide? • Criterion validity: Do the measured values correspond to other measurements of the same thing? • Construct/convergent validity: Do the measured values correlate to measurements of similar things? • Construct/theoretical validity: Do the measurements correspond to predictions?

22. Reliability • The more familiar people are with the good and the scale, the more reliable the measured values • For public goods, referenda and taxes are perhaps best; for (quasi-)private goods, individual questions and entrance fee may be better • The payment vehicle may distort the measure • Payment cards and perhaps bidding games give the most reliable results

23. Potential Biases • Incentive • Strategic • Compliance • Implied value • Starting point • Range • Relational • Importance • Position • Misspecification • Theoretical • Amenity • Context

24. Incentive Biases • The interviewee deliberately gives a false answer • Strategic bias: Influence the outcome • Compliance/sponsor bias: Comply with presumed expectations • Compliance/interview bias: Try to please/impress the interviewer • Protest votes: Interviewees may object to valuation per se, or to being interviewed

25. Implied Value Biases • Starting point bias, in the bidding game • Range bias, in the payment card • Relational bias, if examples of other contributions are mentioned • Importance bias: The fact that the interviewer bothers to ask ... • Position bias, if multiple goods are valued

26. Misspecification Biases -Context • Misspecification of the market scenario • payment vehicle • property right: WTP/WTA • method of provision: like payment vehicle • budget constraint: ability to pay • elicitation: maximum WTP? • instrument: survey may confuse interviewees • question order

27. Other Misspecification Biases • Theoretical • Amenity/symbolic: The perceived good is different than intended • Amenity/part-whole: The interviewee thinks the good is wider or narrower than intended (geographical, issue, policy) • Amenity/metric: Different measurement • Amenity/probability: Different assessments of the chance of delivery

28. Example: Drinking Water in Seoul • A: Interviewer introduction • Explain the purpose of the survey • Indicate that the interview takes less than 30 minutes • B: Background • Opinion about current tap water quality (very good, good, average, bad, very bad) • Measures the household has taken in the last five years to improve water quality (installed water filter, purchased bottled water, boiled tab water regularly, gone to a spring) • Monthly household net income (show card if refuses to answer)

29. Drinking Water in Seoul (2) • C: Value of water quality • Describe major pollution accident in 1991 • If no action, how likely is a repetition? • Describe pollution prevention system • What is the maximum your household would pay in increased monthly taxes for the goal attainable with the new monitoring system? • D: Socio-economic characteristics • Age, highest level of education, number of household members, average monthly water and sewer bill