Stated Preference & Experimental Markets Methods for measuring non-market benefits

Today’s Menu Constructed market approaches Designing a CVM survey Conducting an experiment

Recall revealed preference Remember, our first choice is always to use “revealed preference” approaches to value environmental assets. What if value (or part of value) can’t be captured within an existing market? Answer: use “constructed market” methods

What are constructed market methods? Stated preference methods More generally known as “Contingent Valuation Methods” (CVM) Ask people: “How much is the environmental good worth to you?” Experimental markets Typical goal: learn how people think about environmental goods Two types of experiments Field Laboratory

Some examples The value of the Channel Islands marine reserve? Do people value the organisms or the reserve? Should DDT plume off of Rancho Palos Verde be cleaned up with state funds? How large are the wildlife damages from Exxon Valdez spill? The value of restoring steelhead to Ventura River? The environmental damage from drilling in ANWR?

How elicit “willingness to pay”? No market exists within which to measure value Use survey Many challenges to do a credible job Need to design survey to minimize opportunities for bias of results.

Value of solar-generated electricity Introduction Explain purpose of survey and how long it will take, importance of truthful answers Background attitudes Solar as “green” electricity Compare to “brown” electricity Importance of air quality, current opinion about air quality Have you participated in green markets? Eliciting value of green electricity Concept of Renewable Energy Credit (REC) Would your purchase a REC for $X? (vary X) Socioeconomic characteristics Gender, Age, Race, Income, Greenness

Example – Seoul CVM Survey Instrument Introduction – explain purpose of survey and time to complete (30 min) Request background attitudes and info What is your opinion about current tap water in Seoul? (very good, good, etc) In the last five years have you or anyone in your household taken any of these steps to obtain cleaner water? (install water filter, etc) Value of Water Quality Improvement Explain major pollution accident in 1991 that contaminated drinking water of Seoul If the government takes no action, how many times in the next five years do you think we will have a similar accident? [Give one minute description of continuous monitoring system that will warm your household of contamination] What is the most your household would pay in taxes for such monitoring? Background information Age, education, household size, income

Cookbook procedure [1 of 2] Define the “market scenario” or payment vehicle “How much are you willing to pay for …” vs. “Bond issue has been proposed to pay for …” Determine elicitation method Direct question, discrete choice, bidding game, payment card, etc… Design elicitation scheme Mail, telephone, email, web, in person

Cookbook procedure [2 of 2] Determine sample design Population, randomization of respondents, randomization of questions, etc. Determine experimental design How obtain demand curve and conduct further analysis to answer question Estimate demand function Conduct analysis to answer question

Problems with CVM WTA or WTP?…get different answers. Hypothetical bias How real is the budget constraint? Ambiguity about what is being valued “Warm Glow”—purchase of moral satisfaction? Open-ended is unfamiliar market context Embedding problem Value of one park? Value of suite of parks? Existence value is a problematic concept since it is unobserved

NOAA guidelines for CVM Minimize non-response Personal interviews Pretest for interviewer effects etc. WTP not WTA Referendum format Provide adequate background info. Remind of substitute commodities Include & explain non-response option (not $0)

Types of payment vehicle Payment affects all parties National tax, local tax, fee or charge for use, price increase for use. Note: respondent may disagree with agency responsible for managing resource. Voluntary payment Donation to trust fund Note: remember free-riding problem, also may get strategic bias.

Open-ended elicitation “What is the maximum amount you would be prepared to pay every year [vehicle] to XXX?” For: Straightforward, no implied value cues/anchoring bias, gives max WTP Against: Large non-response/protest, unrealistically large bids, unreliable, unlike normal market transaction

Bidding game elicitation “Would you pay $X every year via [vehicle—tax, utility bill]?” [keep increasing bid until answer is “No” or decrease until “Yes”] For: Forces respondent to consider preferences. Against: Anchor bias, yea-saying, cannot be used in mail surveys.

Payment card elicitation “Which of the amounts listed below describes your maximum WTP every year [using vehicle Y] to improve X?” [list of $ values] For: Avoids starting point bias, values can be actual tax or household benchmarks Against: Range of numbers can induce bias, cannot be used on telephone.

Single-bounded dichotomous choice elicitation (referendum) “Would you pay $X per year using [vehicle] to improve Y?” [randomly vary X] For Simplifies choice (similar to market), minimizes non-response, straightforward Against: May get inflated values, some yea-saying, less informative, starting point bias.

Double-bounded dichotomous choice elicitation “Would you pay $X every year using [vehicle] to improve Y?” [If yes: “And would you pay Z (>X)?”, If no: “And would you pay W (<X)?”. For: More efficient than referendum (because know bounds. Against Same as referendum

Major sources of error in CVM Scenario misspecification Divergence between what respondent is answering and what researcher is asking Implied value cues Unfamiliar choice problem, respondent wants to give “right” answer. Strategic bias Low bid (think taxes will inc. but good won’t) High bid (think won’t have to pay for it)

Reliability of CVM estimates Compare results with comparable revealed preference results Construct market & compare results Use CVM to measure demand for market good Test method (same sample over time) Surveys of purchase intentions and actual purchases (market research)

1. Green Power Demand Objective: derive a demand curve for renewable energy credits in Davis, CA Advise REC company on pricing and capacity Bren GP, 2005 400 survey responses from Davis residents Socioeconomic characteristics, political, knowledge of green power, etc. Method: contingent valuation survey distributed in person to Davis residents Regression of Yes/No on characteristics, price, etc

Regression results

Predicted demand

2. Green building demand 2006 Bren GP Demand for houses constructed of alternative green materials Primarily compressed straw block Key issues: Reliability, energy savings, durability, earthquake, appearance, etc. Method: contingent valuation survey by “Knowledge Networks” – 1000+ responses from across US. Regression of Yes/No on price, socioeconomics, location, rainfall, temp, etc. Second survey to industry – asked to predict consumer demand…consistent with consumer responses?

Consumer vs. Industry

Spatial density of demand

3. Goose Hunting in Wisconsin Duck licenses limited in number and issued by lottery Compare three techniques Travel Cost CVM Experimental Methods CVM WTP and WTA bracketed true value

4: Ecotourism in Kenya Ecotourism captures some of WTP for preserving wildlife Lake Nakuru Nat’l Park in Kenya (360 species of birds) Farming has reduced water quality and subsequent wildlife pops. CVM estimates value park (value to users only) at $7.5 million.

5: Economic value of noncommercial fish (US) Rivers in Four Corners region 2465 miles of river habitat for 9 endangered fish. Protection requires fish bypasses, passageways, habitat improvements. What is the economic value of preserving the habitat?

The application (Four Corners fish) Respondents given Maps of critical habitat Told that officials though habitat protection too costly, were going to eliminate critical habitat designation Asked if they would contribute to “Four Corners Endangered Fish Trust Fund” Also told all taxpayers would contribute

Voting for Four Corners fish If majority votes in favor of contribution to fund: Rivers managed for optimum fish protection. Fish will be saved & removed from ESA over next 20 years. If majority votes against Rivers managed for maximum hydroelectic output. 4 of 9 would likely become extinct.

Actual survey instrument “Suppose a proposal to establish a Four Corners Region Threatened and Endangered Fish Trust Fund was on the ballot in the next nationwide election. How would you vote on this proposal? Remember, by law, the funds could only be used to improve habitat for fish. If the Four Corners Region Threatened and Endangered Fish Trust Fund was the only issue on the next ballot and it would cost your household $______ every year, would you vote in favor of it? Circle Yes or No.” Dollar value randomly chosen from $1 - $350.

Results of Four Corners fish Survey sent to random sample of 800 Four Corners households. Additional 800 to households in rest of US. Average WTP = $195. Extrapolated to rest of population. Benefits far exceeded costs.

Experimental markets Main criticism of CVM is that it is hypothetical. Develop an experimental market, with actual participants to elicit values. Researcher constructs market, including the good(s) and money Observe behavior of subjects (may be field or laboratory)