1. 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

2. Last week Why econometrics? What are the tasks? Specification and estimation Hypotheses testing Example study

3. 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

4. Source: www.evri.ec.gc.ca

6. Total Economic Value of Nature Goods & Services Direct Use Values Indirect Use Values Option Values Bequest Values Existence Values Direct consumption Food Biomass Recreation Health Functional benefits Ecological functions Flood control Storm protection Future direct & indirect use values Biodiversity Conserved habitats Habitats Irreversible changes Value of leaving use- and non-use values for future generations Value of knowledge of continued existence Habitats Endangered species Values decreasingly tangible Use ValuesNon-Use Values

7. Alternative definition of TEV Direct Use Values Indirect Use Values Option Values Bequest Values Existence Values Use Values Non-Use Values Direct consumption Food Biomass Recreation Health Functional benefits Ecological functions Flood control Storm protection Future direct & indirect use values Biodiversity Conserved habitats Habitats Irreversible changes Value of leaving use- and non-use values for future generations Value of knowledge of continued existence Habitats Endangered species Values decreasingly tangible

8. 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?

9. 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

10. 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

11. 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

12. 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

13. Estimating WTP and WTA For n respondents this produces a set of welfare measures W i (i=1,…,i,…,n) where W i 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  -trimmed mean estimators with  =0.05 or  =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

14. 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

15. Design a CV study Define a market scenario Choose an elicitation method Design market administration Design sampling Design of experiment Estimate WTP-function

16. 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

17. 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)

18. Example: Payment card Source: R.T. Carson (1991)

19. 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?

20. 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!

21. 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?

22. 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

23. Potential Biases Incentive –Strategic –Compliance Implied value –Starting point –Range –Relational –Importance –Position Misspecification –Theoretical –Amenity –Context

24. 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

25. 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

26. 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

27. 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

28. 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)

29. 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