Contingent Valuation Method CVM

1
Contingent Valuation Method (CVM)

• is a direct method in that it involves asking a
  sample of the relevant population question about
  their WTP or WTAC.
• 'Contingent Valuation', because valuation is
  contingent on the hypothetical scenario put to
  respondents.
• Advantages1) it can deal with both use and
  non-use values2) by answering WTP and WTAC
  questions it directly goes to the theoretically
  correct monetary measures of utility changes.

2
Contingent Valuation STEPS

• 1) Creating a survey instrument for the
  elicitation of individuals' WTP/WTAC. (a)
  designing the hypothetical scenario (b)
  deciding whether to ask about WTP or WTAC, (c)
  creating a scenario about the means of payment or
  compensation.
• 2) Using the survey instrument with a sample of
  the population of interest.

3
Contingent Valuation STEPS -2

• 3) Analysing the responses to the survey. (a)
  using the sample data WTP/WTAC to estimate
  average WTP/WTAC for the population, (b)
  assessing the survey results so as to judge
  the accuracy of this estimate.
• 4) Computing total WTP/WATC for the population of
  interest for use in a CBA.
• 5) Conducting sensitivity analysis.

4
Contingent Valuation

• Revealed preference methods (TCM, Hedonic Prices)
  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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Example

• 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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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, 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 of
  WTP, or the minimum of WTAC)

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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?

9
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!

10
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