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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. Last week. Why econometrics? What are the tasks?

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valuation 5 the contingent valuation method
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
last week
Last week
  • Why econometrics?
  • What are the tasks?
  • Specification and estimation
  • Hypotheses testing
  • Example study
direct indirect valuation
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
slide6

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

slide7

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

classifications of tev
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?
contingent valuation
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
contingent valuation 2
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
history
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
theoretical foundation
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
estimating wtp and wta
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
wtp vs wta
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
design a cv study
Design a CV study
  • Define a market scenario
  • Choose an elicitation method
  • Design market administration
  • Design sampling
  • Design of experiment
  • Estimate WTP-function
define market scenario
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
choose elicitation method
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)
example payment card
Example: Payment card

Source: R.T. Carson (1991)

administration sample
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?
experiment estimation
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!
validity
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?
reliability
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
potential biases
Potential Biases
  • Incentive
    • Strategic
    • Compliance
  • Implied value
    • Starting point
    • Range
    • Relational
    • Importance
    • Position
  • Misspecification
    • Theoretical
    • Amenity
    • Context
incentive biases
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
implied value biases
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
misspecification biases context
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
other misspecification biases
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
example drinking water in seoul
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)
drinking water in seoul 2
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