ERE9: Valuation II

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ERE9 Valuation II

• The Contingent Valuation Method
• Example Seoul water
• CVM study design
• Validity, reliability, biases
• Embedding and warm glow

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Last week

• Valuation theory
• Total economic value
• Indirect valuation methods
• Hedonic pricing
• Travel cost method

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Constructed Markets

• 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 willingness
  to pay for certain environmental goods and
  services
• Advantage Applicable to more than direct use
  value
• Disadvantages 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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Example Drinking Water in Seoul

• A Interviewer introduction
• B Background
• 1. Opinion about current tap water quality
• 2. Measures to improve water quality
• C Value of water quality
• Describe major pollution accident in 1991
• If no action, how likely is a repetition?
• Describe pollution prevention system
• How much are you willing to pay?
• D Socio-economic characteristics

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Design a CV study

• Define a market scenario
• Choose 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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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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Part-whole Bias Migratory Waterfowl - Survey

• Study Bill Desvouges and colleagues, 1993
• Context Exxon Valdez oil spill
• Funding Exxon Corp.
• Mall survey, developed using focus groups,
  one-on-one pretests, and two mall pretests
• Two shopping malls in Atlanta, Georgia, outside
  the Central Flyway
• 10-12 minutes
• 1205 completed questionnaires

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Protecting Ducks and Geese What is your opinion?

• Q1 How often have you heard about waterfowl
  (select number)
• Q2 Is protecting waterfowl important to you
  (select reasons)
• Show way of Central Flyway second highest number
  of migratory waterfowl, 8.5 million a year
• Q3 How would you rate your knowledge (low, mid,
  high) of threats to the waterfowl (oil spills,
  waste oil, wetland destruction, herbicides and
  pesticides)

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Waterfowl Survey -2

• Describe waste-oil holding ponds
• In 1989, N ducks died there
• Ponds could be covered by nets, Federal
  Government considers this, Fish and Wildlife
  Service would monitor and enforce
• Q4 Think about your income, expenses,
  alternatives. What is the most that your
  household would agree to pay each year in higher
  prices for wire-net covers to prevent about N
  migratory waterfowl from dying each year in
  waste-oil holding ponds in the Central Flyway?

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Waterfowl Survey -3

• Q5 Is the amount greater than zero. If yes,
  select most important reason
• Q6 If no, select most important reason
• Q7 Indicate agreement to statements
• Q8 Ditto for waterfowl
• Q9 Activities
• Q10 Age Q11 Education Q12 Sex Q13 Race Q14
  Income Q15 Household size Q16 Membership

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Waterfowl Results

• 398 answered for N2,000 408 for N20,000 399
  for N200,000
• Excluded 29 as outliers (3), protest bids
  (8), unlikely (1) and rubbish (17)
• WTP (2,000) 59 ? 16 /household/year
• WTP (20,000) 59 ? 10 /household/year
• WTP (200,000) 71 ? 15 /household/year
• Not significantly different!

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Waterfowl Reasons

• Desvousges et al. we find that CV yields
  estimates that fail to meet several basic
  criteria for accuracy
• Diamond and Hausman responses to CV questions
  are not consistent with the basic economic theory
  of choice
• People cannot count
• People do not listen
• People realised that 2,000 or 200,000 ducks is
  small compared to 8.5 million
• Embedding and warm glow

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Embedding

• WTP for same good varies depending on whether it
  is assessed on its own or embedded as part of a
  more inclusive package
• Kahnemann (1986)
• WTP to prevent drop in fish population in all
  Ontario lakes or small area respectively
• Scope effect
• Sub-additivity effect
• Possible explanations
• Substitution and satiation
• Purchase of moral satisfaction (warm glow)

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Some Puzzles

• In a large economy, no one should contribute to
  public goods like the Red Cross, the Salvation
  Army, Greenpeace yet they do
• Government support should crowd out charitable
  donations but it does not
• This suggests that people donate to public goods
  for other reasons than pure altruism social
  pressure, guilt, sympathy or warm glow may
  explain this

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Implications for the use of CVM

• Is any number better than no number?
• How should warm glow be accounted for?
• Summing over population can produce enormous
  estimates
• And small errors can make significant differences

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Alternatives to CVM

• (Contingent) choice modelling, or conjoint
  analysis, is similar to contingent valuation in
  that it is a stated preference technique based on
  surveys
• The main difference is that instead to asking
  who much are you willing to pay, the question
  is which situation would you prefer
• Choice modelling is choice experiments,
  contingent ranking, contingent rating and paired
  comparisons