Valuation 5: The Contingent Valuation Method

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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

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Last week

• Why econometrics?
• What are the tasks?
• Specification and estimation
• Hypotheses testing
• Example study

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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

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Source www.evri.ec.gc.ca
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Source www.evri.ec.gc.ca
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Total Economic Value of Nature Goods Services
Use Values
Non-Use Values
Direct Use Values
Indirect Use Values
Option Values
Bequest Values
Existence Values
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Alternative definition of TEV
Direct Use Values
Indirect Use Values
Option Values
Bequest Values
Existence Values
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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?

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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

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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

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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

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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

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Estimating WTP and WTA

• For n respondents this produces a set of welfare
  measures Wi(i1,,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 a0.05 or
  a0.10
• 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

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WTP vs WTA

• People view gains and losses differently
• WTP is limited to an individuals 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

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Design a CV study

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

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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

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Choose elicitation method

• Direct question How much are you willing to pay?
• Bidding game Are you willing to pay X? If yes,
  Xd? 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)

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Example Payment card
Source R.T. Carson (1991)
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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?

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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!

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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?

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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

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Potential Biases

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

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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

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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

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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

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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

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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)

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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