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Contingent Valuation Method
Contingent Valuation Method JC Whitehead, Appalachian State University, Boone, NC, USA TC Haab, The Ohio State University, Columbus, OH, USA ã 2013 Elsevier Inc. All rights reserved.
Glossary Incentive compatibility The extent to which respondents are encouraged to supply truthful answers to hypothetical questions. Nonuse value The willingness to pay for a policy that is unrelated to changes in behavior. Payment rule A description of the conditions required for the policy to be implemented. Payment vehicle The means of payment in a willingness to pay question. Reliability The extent to which a valuation method consistently generates the same measure.
Overview The contingent valuation method (CVM) is a stated preference approach to the valuation of amenities, recreational, and other behaviors related to environment and natural resources. Preferences are ‘stated’ in the sense that survey respondents are asked hypothetical questions directly about their values for the environment. This is in contrast to revealed preference methods, such as the travel cost method and the hedonic pricing method, for valuing the environment, in which values are revealed by observable individual and household behavior. The CVM differs from other stated preference approaches. The contingent behavior approach employs hypothetical questions about behavior with values estimated using empirical methods of revealed behavior approaches. The choice experiment approach focuses on the marginal valuation of attributes of policy. The CVM is useful for estimating benefits and costs for environmental and natural resource policy analysis and benefit–cost analyses involving nonmarket goods and services. The CVM has been used for major policy analyses associated with the US Clean Water Act, the US Clean Air Act, and the Natural Resource Damage Assessment associated with the Exxon Valdez oil spill. The CVM was first suggested by S.V. Ciriacy-Wantrup in the context of soil erosion policies in 1947. Robert Davis first implemented the CVM in a 1963 study of forest recreation in Maine. Alan Randall, Berry Ives, and Clyde Eastman provided the first published application of the CVM in 1974 focusing on nonuse visibility values in the Four Corners region of the US Southwest. The early development of the CVM was greatly improved by two books. Ronald Cummings, David Brookshire, and William Schulze edited a 1986 volume that arose from a conference that took a critical look at the CVM. Robert Cameron Mitchell and Richard Carson produced a comprehensive book in 1989 that focused on methods to conduct valid and reliable CVM studies. Shortly after Mitchell and Carson, the Exxon Valdez oil spill focused attention on the measurement of
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Stated preference Hypothetical questions that are posed to survey respondents to elicit their values for the environment. Use value The willingness to pay for a policy that is revealed by changes in behavior. Validity The extent to which a valuation method generates a measure that is unbiased. Valuation scenario Survey description of the policy to be valued, the payment vehicle, the policy implementation rule, and the valuation question. Willingness to pay The theoretical construct of economic benefits that contingent valuation questions are designed to measure.
nonuse values with the CVM and the 1990s was an active and often contentious period of research, which is well summarized in a 1996 book edited by David Bjornstad and James Kahn and a 1994 symposium in the Journal of Economic Perspectives. Research was further motivated by the guidelines provided by NOAA Blue Ribbon Panel report on CVM. The early research into the methods for eliciting values was followed by a brief but intense period of research through the 1990s, developing the statistical methods for analysis of CVM data. The standard statistical methods are laid out in the 2002 book by Tim Haab and Ted McConnell. The following decade has been much quieter, with the number of CVM applications rising while the methodological research has slowed. In the rest of this article, the advantages of the CVM, the implementation of the CVM, and the accuracy of the method are all described. Most economists always prefer revealed preference methods for valuation. In that context, the advantages of the CVM include added flexibility and the ability to measure nonuse values and values considering ex ante uncertainty. The CVM requires a survey-based data collection effort beginning with questionnaire design. Attention to writing of the valuation scenario and valuation questions is emphasized. Accuracy of the CVM has long been an issue. Various tests for validity and reliability are also described.
CVM Survey Design The components of a contingent valuation scenario include a description of the resource or policy context, a description of the policy or proposed change in resource allocation that will be valued, a payment vehicle, and a payment rule. Respondent willingness to pay may depend on each of these contextual factors. Although the hypothetical nature of CVM is unavoidable, there are certain guidelines survey designers can follow that will help enhance accuracy. In particular, the scenario must be believable, create limited opportunities for free riding,
Encyclopedia of Energy, Natural Resource and Environmental Economics
http://dx.doi.org/10.1016/B978-0-12-375067-9.00004-8
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and respondents must believe that their response will be consequential in determining ultimate implementation of the proposed scenario. CVM surveys must focus on the design of the valuation scenario and valuation questions. But the CVM cannot be implemented without consideration of more general survey issues. CVM surveys are implemented with mail, in-person, telephone, and Internet surveys. Other environmental valuation methods rely on survey data, but the peculiarities of various survey methods may impact stated preference methods, especially CVM and choice experiments, more acutely. For example, CVM and choice experiment scenario descriptions can be more effective with visual aids such as photographs and charts. Telephone surveys preclude visual aids unless the survey is combined with mailed survey booklets. In addition, policy analysis requires aggregation of willingness to pay values and high survey response rates facilitate accurate aggregation. Low survey response rates require consideration of sample nonresponse and sample selection bias. CVM sample design should also consider the extent of the market, the typical negative relationship between willingness to pay and distance, when determining the population over which to sample. The description of the proposed policy should make explicit exactly what is being valued. A concrete scenario description allows each respondent to understand what good or service is obtained in exchange for payment. Scenario descriptions must include the baseline level of environmental quality or natural resource allocation and changes to this baseline. These descriptions must be nonpersuasive and neutral. Scenario descriptions can include photographs, diagrams, maps, and other visual aids with mail, in-person, and Internet survey modes. Survey questions eliciting perceptions about the impacts, the likelihood, and the credibility of the scenario, are necessary in order to confirm respondent understanding of these impacts. The payment vehicle and payment (i.e., policy implementation) rule are closely related. Payment vehicles are the way that respondents would actually pay for the change in resource allocation. Typical payment vehicles include increases in utility bills, increases in taxes, and increases in prices of related goods, user fees, and donations to special funds. The payment vehicle must be realistic, believable, and neutral. The payment rule makes explicit under what conditions the policy will be implemented. For quasi-public goods for which use is excludable, the payment rule is understood as payment of a fee for service or access. Respondents have little incentive to misrepresent their preferences. Payment rules for nonexcludable and nonrival public goods are more complex. Two of these are voluntary contributions and referenda. The payment rule for voluntary contributions is that if donations exceed the program costs, then the program will be recommended for implementation. In this case, respondents have at least a weak incentive to tell the truth. However, subsequent payment is not enforceable. When government tries to collect money for the special fund, they might discover that people free ride. This may cause people who want the policy to overstate their willingness to pay. The policy implementation rule with voluntary contributions is often implicit. If aggregate donations exceed costs, then the policy will be implemented. Incentive compatibility of voluntary donations may be enhanced with provision point and other rules.
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The payment rule with a referendum is majority rule. If 50% or more of respondents vote for the policy, then it will be recommended for implementation. In combination with an involuntary tax payment vehicle, there is little incentive for a respondent to misrepresent his or her preferences. Suppose a hypothetical referendum is expected to influence governmental policy. If a respondent votes for the policy at a tax payment greater than their willingness to pay and the policy is ultimately implemented, then the respondent is worse off. Likewise, the respondent could be worse off after a vote against a policy at a tax payment less than their willingness to pay if that vote influences the policy to be not implemented. Debriefing questions that identify protest responses and elicit perceptions of the valuation scenario are typically used to help better understand respondent preferences. Protest responses are typically zero willingness to pay values or votes against a referendum that reflect rejection of the valuation scenario. For example, respondents may be willing to pay for the policy at the tax level but a lack of trust in government’s ability to successfully implement the policy could lead to a vote against the policy. One debriefing question is about the effectiveness of the policy. Respondents who perceive that the policy is likely to achieve the goals stated in the valuation scenario are more likely to provide valid and reliable willingness to pay estimates. Another debriefing question is to elicit perceptions about the consequentiality of the survey. Consequentiality refers to the perception that the results of the survey could have policy implications. Incentive compatibility is enhanced for all policy implementation rules if respondents believe that the survey is consequential.
Willingness to Pay Question Formats There are a number of different types of willingness to pay valuation questions. Early applications of the CVM asked respondents directly about their willingness to pay devoid of a behavioral context. Many early CVM applications asked the open-ended question: ‘What is the maximum amount of money that you would be willing to pay for the improvement in environmental quality?’ This question has several disadvantages. Being an open-ended question, it is relatively difficult to answer. Respondents must work hard to research their preferences to formulate accurate values. Instead, respondents may adopt simple valuation strategies and anchor responses on digits ending in zero and five. High item-nonresponse rates are also a problem with open-ended questions because the question is unfamiliar to respondents. The open-ended question is also relatively easy to free ride. Respondents might answer ‘zero’ or ‘$1’ even if their other answers indicate that they might have a much higher value. The payment card question asks an open-ended question but provides dollar interval response categories to respondents. Respondents could be given the following response categories: ‘Between $1 and $5,’ ‘Between $5 and $10,’ ‘Between $10 and $15,’ and ‘More than $15.’ Respondents would then indicate the response that most accurately reflects their maximum willingness to pay. A problem is that payment card questions are prone to ‘range bias.’ In the example above, the average willingness to pay will likely be between $1 and $15. If another response category is included, say ‘Between $15 and $20,’ the
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average willingness to pay may rise. The reason is that many survey respondents are very open to suggestion when answering unfamiliar questions. The preferred question format of most CVM practitioners is the close-ended question. The earliest version of the closeended question was the iterative bidding question. Everyone in the sample was asked: “Would you be willing to pay $A for the improvement in environmental quality?” The $A is the starting point. If the respondent answered ‘yes,’ they would be asked the question again with a higher dollar amount. These questions would continue until the respondent answered ‘no.’ If the respondent answered ‘no,’ they would be asked the question again with a lower dollar amount until the respondent answered ‘yes.’ The iteration could continue until willingness to pay is narrowed down to the dollar. The result is a continuous measure of willingness to pay obtained from relatively easy to answer questions that are more difficult to free ride. The cost of iterative bidding is starting point bias. If the starting point is $5, the average willingness to pay amount ends up lower than if the starting point is $25. The dichotomous choice question has become the dominant form of CVM question. The dichotomous choice question is similar to the initial iterative bidding question with two differences: (1) the starting point is varied across survey respondents and (2) the starting point is the ending point (i.e., there are no follow-up willingness to pay). The advantage of the dichotomous choice question is that each respondent is asked a single valuation question that is relatively easy to answer. The major disadvantage is that the CVM researcher only learns whether each respondent’s willingness to pay is above or below the dollar amount threshold. More sophisticated econometric methods are necessary to develop an average willingness to pay amount. Even then, the variance on average willingness to pay tends to be large relative to valuation questions that produce continuous willingness to pay distributions. Another disadvantage is that larger samples are necessary to implement the dichotomous choice approach. For each dollar amount version included in the experimental design, researchers need a large sample (about a minimum of 40) for statistical purposes. The double-bounded approach adds one follow-up question to the single-bound dichotomous choice question. If the respondent answers ‘yes’ to the first question then the dollar amount is increased, typically doubled, and the question is asked again. If the respondent answers ‘no,’ then willingness to pay is bounded between the dollar amounts. If the respondent initially answers ‘no,’ then the dollar amount is reduced (typically halved), and the question is asked again. Respondents are distributed across four groups: ‘yes, yes,’ ‘yes, no,’ ‘no, yes,’ and ‘no, no.’ An extension of the double-bounded valuation question is iterative bidding with a random start. ‘Yes, yes’ and ‘no, no’ respondents are asked more follow-up questions until their willingness to pay value actually has upper and lower bounds. The benefit of the multiple bounds is that the variance of the willingness to pay estimate may be further reduced. The disadvantage is, again, the potential for starting point bias. The benefit of the follow-up question is that analysis of these data substantially reduces the variance of the average willingness to pay estimate. A disadvantage is that the responses to the follow-up questions might lead to willingness to pay estimates that differ from the willingness to pay
estimates from the first valuation question. In other words, the follow-up questions may also be prone to a form of starting point bias. In addition, behavioral researchers have found that responses to follow-up questions tend to come from different psychological motivations than the initial response and follow-up questions may not be incentive compatible. CVM researchers have also experimented with including more response categories to the close-ended valuation question. The most practical category to include is ‘don’t know’ in addition to the standard yes/no options, a trichotomous choice. Polychotomous choice questions might include variations of the yes/no answer to indicate respondent uncertainty by adding categories such as ‘definitely yes,’ ‘probably yes,’ ‘probably no,’ and ‘definitely no.’ These questions supply useful information about respondent preferences. Another form of multiple-bounded valuation questions is a combination of the payment card and polychotomous choice question. In this visual question format, a wide range of dollar amounts are offered in the first column and respondents are asked to state their willingness to pay each amount by checking boxes in columns expressing various levels of certainty. The cost is the unfamiliarity of the valuation exercise for respondents. In a single-column ‘payment ladder’ variation, respondents may indicate all of the lower values that they would certainly pay and all of the higher values they certainly would not pay. The benefit of the multiple-bounded approach is the expression of uncertainty and the multiple observations for each respondent, which increases econometric efficiency.
Willingness to Accept For many public goods, the implicit property right of the good is held by society or the government, that is, someone other than the respondent. In this case it is appropriate to ask a willingness to pay question, which is essentially: “how much would you give up in order to obtain something that someone else currently owns?” The willingness to pay question does not change the implicit property rights of the resource. For some types of policy, however, the respondent holds the implicit property right and the willingness to pay question changes the property rights. This complicates the valuation process if the change in the property rights has an effect on the estimated value of the good through protest responses. Another approach is to ask a willingness to accept question: “would you be willing to accept $A for a decrease in environmental quality?” The willingness to accept question does not alter the implicit property rights. When income effects are small (i.e., small willingness to accept and small willingness to pay), willingness to pay will be a close approximation of willingness to accept. Considering the indifference curves implied by the comparison of the indirect utility functions in income and quality space, a sufficient amount of compensation of income (i.e., market goods) would leave the respondent no worse off as before the decrement in the public good. For a private good, for which there are good substitutes, willingness to accept and willingness to pay should not be different. Willingness to accept may exceed willingness to pay because willingness to accept for a public good has few good substitutes and is not income constrained. Although the divergence can be theoretically understood, in application, the
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willingness to accept question can be problematic. A number of empirical comparisons find, however, that willingness to accept significantly exceeds willingness to pay even with small income effects. Willingness to accept questions often generate a large number of values that do not conform to consumer theory. Primarily out of convenience, willingness to pay questions have been used when the willingness to accept question is theoretically more appropriate. In the context of policy analysis, using the willingness to pay in place of the willingness to accept question provides a conservative estimate of willingness to accept.
Advantages of the CVM The CVM is firmly grounded in welfare economic theory. Respondents are assumed to answer contingent valuation questions based on the value they place on the policy or programs. In short, it is assumed that survey respondents choose their response to a hypothetical value elicitation scenario as if they are facing a real and consequential choice. Respondents will choose the response that maximizes their own satisfaction (utility) subject to budgetary considerations. Maximization of utility subject to the income constraint yields the indirect utility function, which depends on prices of market goods, income, and public goods. Willingness to pay for changes in a public good is thus the difference in income necessary for the respondent to be indifferent between the status quo and the change in the allocation of the public good, its quality, or access price. Alternatively, responses to CVM value elicitation questions can be supposed to derive from respondents’ desire to minimize the monetary outlay necessary to maintain a reference level of satisfaction. The minimization of expenditures subject to the utility constraint leads to the expenditure function. In the expenditure function format, respondents directly express their willingness to pay for improvements to prevent degradation of the conditions leading to the baseline utility. Willingness to pay is the difference between status quo expenditures and expenditures with the change in the allocation of the public good, its quality, or access price.
Flexibility Relative to the revealed preference methods, the CVM is the most flexible valuation approach available to policy analysts. For example, the most popular revealed preference method, the travel cost method, is largely focused on the valuation of outdoor recreation trips and quality attributes of the visited recreation sites. The travel cost method relies on observable variation in site quality to shift the observed demand for recreation trips. While seated in observed quantities, the travel cost method is constrained by the range of observed quality variation, which is often inadequate for the valuation of the large quality changes demanded by policy. The hedonic pricing method is typically limited to analysis of labor, housing, and automobile markets because in other markets data are usually unobtainable for prices and observable characteristics that are useful for public policy analysis. These markets are presumed to react efficiently to changes in public goods and fully reflect the value of these changes
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through equilibrium price adjustments. Because public good changes affect entire markets with limited differential impact on market participants, the valuation of discrete changes in public goods requires observations from multiple markets or alternatively requires statistical manipulation to derive the full value of any significant change in magnitude. The averting behavior approach, which relies on the observation of defensive actions taken by consumers to avoid health impacts, focuses mainly on the health effects of air and water quality and safety effects of protection equipment. The approach is primarily constrained by the lack of variation in environmental quality and the discrete nature of the decisions. Revealed preference methods are constrained to quasipublic goods. Quasi-public goods are those for which the environmental good is a characteristic of a market good. The Hicksian, or compensated, demand for the market good is the first derivative of the expenditure function with respect to the price of the quasi-public good. If environmental quality is a characteristic of recreation behavior, the demand will move in the same direction as the change in environmental quality. Revealed preference methods require that the observed demand for the market good be estimated and then the effect of the environmental quality on the market good must be isolated. If these two empirical conditions are satisfied, the revealed preference method can be used to estimate a close approximation to use value, the uncompensated consumer surplus (non-Hicksian), resulting from the change in the quasi-public good. In contrast, most quasi-public goods, for which there are implicit markets for comparison, and pure public goods, for which no implicit market exists, are within the domain of CVM applicability. The only constraint that application of the CVM imposes is that a realistic valuation scenario must be constructed around payment and delivery of the change in environmental quality. Where revealed preference methods are constrained to the realm of observable quality changes. Realistic policy analysis often requires valuation beyond the observable range; for example, restoration of environmental quality to levels not observed within the respondent’s lifetime. The CVM obviates the need for observation and introduces the flexibility to value wide ranges of quality changes. This flexibility extends to the valuation of projects of different scopes. Multiple valuation questions can be used to estimate the value of the incremental benefits of a project to determine the scope at which the net benefits are maximized. Most applications of the implicit market methods are limited to simulated changes in scope and the validity of these simulations for large changes are tenuous due to nonlinearities and other complications. In addition, the other stated preference methods are limited by the necessity of framing the hypothetical question in the appropriate behavioral context. The contingent behavior approach relies on asking respondents their anticipated behavioral response to hypothetical changes in public good attributes. Choice experiments are constrained by development of realistic combinations of attributes of alternatives.
Nonuse Values Beyond flexibility, stated preference methods offer advantages over revealed preference methods in the types of values that can be measured. Willingness to pay is the total value of a
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policy change and can be decomposed into use and nonuse values. For example, suppose that the change in environmental quality is realized while use of the market good related to environmental quality is restricted to zero. The nonuse value of the policy change is equal to the change in expenditure functions with use of the good constrained to zero. Stated preference methods, and especially the CVM, are the only methods available for measuring the economic value of policy for people who do not experience the changes resulting from policy directly. Direct changes might be experienced through on-site recreation, changes on the job, changes in the neighborhood of residence, or through changes in one’s own health. For some policies, nonuse values may exist but their contribution to total value is not substantial. In these cases, revealed preference methods may be sufficient. However, for some policies ignoring the measurement of nonuse values would lead to significant errors in policy analysis. The problem of failing to observe values when use is zero goes beyond the practical. In most formulations, revealed preference theory requires the weak complementarity assumption. In order for the change in demand for the good to represent a valid measure of the value of the change in the public good, consumers are assumed to receive no utility change from the quasi-public good change when the associated good is not consumed. In other words, not only are revealed preference methods incapable of measuring nonuse values, the research often assumes that nonuse values do not exist in order to validate the values estimated from revealed preferences. Willingness to pay questions, as derived through the CVM, tend to elicit the total economic value. The nonuse value can be elicited from survey respondents in several ways. One approach is that the willingness to pay question would elicit total value as usual from current users and current nonusers of the resource. The limitation of this approach is that environmental quality improvements can lead nonusers to become users. In this situation, revealed behavior and contingent behavior questions could be used to determine use of the resource with and without the policy. If use of the resource changes with the policy, use values can be estimated and then compared to the total value. The residual between total and use values is an estimate of the nonuse value. Some policies will not affect use of the resource. Then the entire willingness to pay value is the nonuse value.
Valuation Under Uncertainty Ex post measures of value can incorporate uncertainty by assigning probabilities to different outcomes. The sum of the probability weighted ex post willingness to pay amounts from revealed preference methods yields expected surplus. For policies and projects that involve significant uncertainty, the appropriate measure of the impacts of policy is an ex ante measure. The option price is the ex ante willingness to pay measured before the uncertainty is resolved. Any willingness to pay estimate elicited from CVM can be interpreted as an option price, regardless of whether the analyst explicitly incorporates uncertainty in the willingness to pay questions or theoretically or empirically models the uncertainty. This is so because contingent valuation respondents will answer willingness to pay questions after considering all the uncertainties that they are aware of at the time.
In order to define willingness to pay under uncertainty, consider a policy that may yield two probabilistic outcomes where the probabilities sum to one. The expected surplus of the policy is the sure payment regardless of which outcome is realized. The sure payment is the willingness to pay values under each outcome weighted by the probabilities. The expected surplus is an ex post measure of benefits and can be estimated with the revealed preference methods. The option price is the ex ante willingness to pay for the increment before the uncertainty is resolved. It is the amount of money that must be subtracted from income so that the sum of the probability weighted utility functions are equal to utility under the status quo. In the case of supply uncertainty, willingness to pay questions could explicitly describe the various uncertainties before the valuation question is presented. Respondents would then incorporate the uncertainty into their response. Subjective demand probabilities can be directly elicited from respondents before or after the valuation question is presented. Another approach is to estimate demand probabilities from revealed behavior. While under certain restrictive conditions it is feasible to estimate the option price with revealed preference methods, the CVM is the only approach that can estimate the option price with incorporation of variation in demand and supply probabilities. One problem encountered in estimating willingness to pay under uncertainty is the failure of respondents to understand risk and probabilities. Understanding is especially challenging when probabilities are low, such as when estimating the value of small changes in mortality risks. While this has been a problem in a number of studies, reviews and comparison studies indicate that the CVM estimates of the value of risk reductions tend to fall in the range of the estimates from labor market and averting behavior studies.
Accuracy As the CVM is based on responses to hypothetical valuation questions, there have been concerns about the accuracy of value estimates. Accuracy of a measure of a theoretical construct (e.g., willingness to pay) is comprised of validity and reliability. Validity is the extent to which a valuation method generates a measure that is unbiased, that is, provides an estimate centered around the true value, if it were known. Reliability is the extent to which a valuation method consistently generates the same measure. While reliability can often be demonstrated through repetition and replication, validity is more difficult to demonstrate when valuing nonmarket goods and services. By their nature, the ‘true’ value of nonmarket goods and services are unknown. A valid method for estimating these values is thus attempting to provide an unbiased estimate around an unknown and unobservable quantity. It is important that CVM studies demonstrate some degree of both validity and reliability.
Validity There are several types of validity that have been considered in the contingent valuation literature. Criterion validity is the extent that the measure of hypothetical willingness to pay
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compares favorably to another measure of the theoretical construct that is considered valid (e.g., actual willingness to pay). Convergent validity is the extent that a measure is correlated with a similar measure of the same underlying theoretical construct. Theoretical, or internal, validity is the extent to which a measure changes in expected ways with changes in variables related to the measure. In addition to these, all contingent valuation studies should be assessed on their face validity – the extent to which the survey instrument and valuation scenario measures the underlying theoretical construct of willingness to pay. One of the more persistent empirical results in the CVM literature is the tendency for hypothetical willingness to pay values to overestimate real willingness to pay values (i.e., actual payment). In other words, CVM tends to fail criterion validity tests. In general, survey respondents tend to state that they will pay for a good when in fact they will not, or they will actually pay less, when placed in a similar purchase decision. This result has been found in a variety of applications including private goods and public goods. One cause is that the ceteris paribus condition does not hold between the actual and hypothetical scenarios. Willingness to pay statements are behavioral intentions and actual payment is revealed behavior. Respondents in a hypothetical scenario may expect that more income or time will be available when the situation described in the hypothetical scenario will actually occur. Current income and time constraints are not necessarily binding in the survey setting and the behavioral intentions will be overstated, relative to the current time period. Research has attempted to empirically discover the source of the overstatement of willingness to pay and develop question formats or survey adjustments that minimize the overstatement. Several researchers find that the divergence between hypothetical and real willingness pay is mitigated or eliminated, by providing additional instructions to respondents encouraging them to carefully consider their budget constraints, substitutes, and to treat the hypothetical scenario as if an actual monetary transaction were taking place. Such ‘cheap talk’ methods have proven somewhat effective in establishing the criterion validity of CVM. Other researchers find that hypothetical willingness to pay is similar to actual willingness to pay when the level of certainty respondents have about making payment is taken into account. Significant evidence exists that the more certain or confident respondents are they would make payment if payment were transacted, the greater the criterion validity. Another approach to understanding criterion validity is an investigation of the incentive compatibility of different question formats. There are theoretical reasons why hypothetical market results tend to generate the divergence in hypothetical and real willingness to pay. Scenarios that involve the provision of public goods with a voluntary contribution format and the purchase of private goods could be expected to lead to overstatements of hypothetical willingness to pay. Respondents, when considering a public good with individual policy costs and a referendum vote, will tend to truthfully reveal their willingness to pay if they believe their votes will ultimately impact a decision to implement the project. If respondents believe that there is some nonnegligible probability that the project will be implemented if the hypothetical referendum
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passes, then, at least in theory, incentives exist for truthful revelation of willingness to pay. The exact probability of implementation that leads to consequentiality is an unanswered empirical question. One approach for establishing convergent validity is through a valuation comparison study in which theoretically similar valuation estimates from two or more methodologies, such as CVM and the travel cost method, are compared. Estimates that are statistically similar (i.e., overlapping confidence intervals) achieve convergent validity increasing the confidence in both valuation estimates. There is some consensus that CVM can achieve convergent validity with other methods. However, convergent validity tests between stated and revealed preference methods suffer from a potential logical dilemma because stated and revealed methods measure potentially different values (e.g., total value vs. use value), convergence between values across methods may be evidence of validity, but divergence between values is not necessarily evidence of invalidity. The divergence may simply be different methods measuring different values with no ‘truth’ to establish the valid measure for comparison. A more rigorous approach to convergent validity is the combination and joint estimation of stated and revealed preference data. Rather than use stated and revealed preference methods as competing methods for achieving the same ends, the methods can be combined within the framework of a common preference construct and then tested for consistency within that framework. Joint estimation uses alternative methods to limit the critical flaws of each. For example, joint estimation employs stated preference data that goes beyond the range of historical experience, while grounding the estimates in the reality of revealed preference data. Despite the potential gains of using multiple methods to limit the drawbacks of any particular method, the majority of the empirical evidence suggests that revealed and stated preference data fail consistency tests. However, that has not stopped researchers from continuing to develop advanced empirical methods to impose consistency on the data and exploit the complementarities in the data. Theoretical validity is the extent to which a valuation measure changes in response to the changes in conditions under which it is evaluated. Theoretical validity is also known as internal validity because the tests conducted are internal to the data. Theoretical validity tests begin with economic theory. Comparative static results are derived from the willingness to pay function as derived from the assumed underlying preference structure. For example, willingness to pay can be shown to decrease with own-price, increase or decrease with price of substitutes or complements, and increase with income (for normal goods). The bulk of the evidence finds that willingness to pay estimates are theoretically valid to some extent. Following the NOAA guidelines, the so-called scope test has taken on extra significance. Sensitivity to the scope of the resource allocation change exists if willingness to pay is nondecreasing in quality or quantity. The empirical research on scope is mixed and provides plenty of room for continuing investigation. Related, tests for multipart policy can indicate substitute and complementary relationships between policy components. Valued independently, the sum of willingness to pay for two policies is greater than willingness to pay for
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the two policies valued jointly if the policies are substitutes. In the context of the scope test, willingness to pay for the jointly valued policies should be greater than independent valuation of either policy.
Reliability Reliability is the extent that willingness to pay is nonrandom. Reliability tests focus on the within and across study variation in estimates rather than the ability of studies to accurately measure unbiased value. The lower the variability in estimates, the more consistent those estimates are and the less influenced by researcher decisions. High variability leads to the ability of practitioners to significantly influence results in one direction or another. Unreliable results are indefensible against the criticism that the researcher is determining the result. There are several tests for reliability of the CVM including econometric, test–retest, and alternative form reliability. Econometric reliability is the ability to explain the variation in willingness to pay through observable variables included in the econometric specification. Test–retest reliability is the consistency of willingness to pay estimated at two different times. Alternative form reliability is the consistency of willingness to pay across different forms of the valuation question. Econometric reliability can be tested with statistical measures of overall fit of a regression model. In a least squares regression model, a significant F statistic is a measure of reliability. In a limited dependent variable model, a significant chi-squared statistic is a measure of reliability. Econometric reliability proves difficult to establish because the preferred behavioral question format (dichotomous choice) is the least reliable format econometrically. The limited information collected from a dichotomous choice question – willingness to pay is either above or below a randomly assigned threshold – necessarily increases the statistical variability in willingness to pay estimates. Econometric variability can be reduced through the collection of more responses from each respondent, increasing sample size or through the use of alternative question formats. Test–retest, or temporal, reliability involves conducting more than one CVM survey with time between surveys. The time period could be 1 month, 1 year, or more. If the magnitude of willingness to pay is consistent across time, then willingness to pay is considered temporally reliable. Consistency in factors affecting willingness over time is also evidence of temporal reliability. However, a temporal difference in willingness to pay does not necessarily indicate unreliable results. If willingness to pay changes over time in response to changing factors that affect willingness to pay, then the researcher may conclude reliability. Alternative form reliability can be examined with different forms of the valuation question or by asking about willingness to pay in a lump sum or a series of payments. Comparisons of referendum and payment card willingness to pay, for example, that yield similar estimates leads to conclusions of reliability. However, given the different incentives embedded in different valuation questions, differences in willingness to pay in expected directions can be used as evidence of reliability. Most contingent valuation applications elicit a series of payments assuming the current period budget constrains the
willingness to pay. An alternative is to assume that respondents are constrained by their lifetime wealth and elicit a lump-sum payment. In this case, the respondent would apply his or her own rate of time preference to the project and state the present value of willingness to pay. If the average of the individual rates of time preferences is equal to the social discount rate the two approaches should yield the same willingness to pay amount. However, there is some evidence that respondents answer lump-sum willingness to pay questions with an unrealistically high implicit discount rate.
Conclusions The CVM is a highly flexible and relatively simple method for the estimation of values for goods and services not otherwise valued in traditional markets. However, the flexibility and simplicity of CVM come at a high cost. In its most basic form, CVM is a method for asking people what they would be willing to pay. Because anyone can ask a valuation question, CVM studies of high and low quality proliferate. Critics of CVM point to the hypothetical nature of the questions, the ability of practitioners to influence results through question format , econometric manipulation, and the often conflicting results on tests of validity as evidence of the inadmissibility of CVMderived values into policy analysis. The challenge for CVM practitioners is to thoroughly understand not only the flexibility of the method but also its limitations and avoid the traps of simplicity. While simple to implement, the defense of CVM-derived values and the defense of the method itself are far from simple.
See also: Allocation Tools: Environmental Cost-Benefit Analysis.
Further Reading Alberini A and Kahn JR (eds.) (2006) Handbook on Contingent Valuation. Northamption, MA: Edward Elgar. Bateman IJ and Willis KG (eds.) (2001) Valuing Environmental Preferences: Theory and Practice of the Contingent Valuation Method in the US, EU and Developing Countries. New York, NY: Oxford University Press. Bjornstad DJ and Kahn JR (eds.) (1996) The Contingent Valuation of Environmental Resources: Methodological Issues and Research Needs. Brookfield, VT: Edward Elgar. Carson RT and Groves T (2007) Incentive and informational properties of preference questions. Environmental and Resource Economics 37: 181–210. Carson RT and Mitchell RC (1993) The value of clean water: The public’s willingness to pay for boatable, fishable, and swimmable quality water. Water Resources Research 29: 2445–2454. Carson RT, Mitchell RC, Hanemann M, Kopp RJ, Presser S, and Ruud PA (2003) Contingent valuation and lost passive use: Damages from the Exxon Valdez oil spill. Environmental and Resource Economics 25: 257–286. Cummings RG, Brookshire DS, and Schultze WD (eds.) (1986) Valuing Environmental Goods: An Assessment of the Contingent Valuation Method. Totowa, NJ: Rowman & Allanheld. Diamond PA and Hausman JA (1994) Contingent valuation: Is some number better than no number? Journal of Economic Perspectives 8: 45–64. Haab TC and McConnell KE (2002) Valuing Environmental and Natural Resources: The Econometrics of Non-Market Valuation. Northampton, MA: Edward Elgar. Hanemann WM (1994) Valuating the environment through contingent valuation. Journal of Economic Perspectives 8: 19–43.
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Loomis JL (2011) What’s to know about hypothetical bias in stated preference valuation studies? Journal of Economic Surveys 25: 363–370. Mitchell RC and Carson RT (1989) Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington, DC: Resources for the Future. Portney PR (1994) The contingent valuation debate: Why economists should care. Journal of Economic Perspectives 8: 3–17.
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Smith VK (2006) Fifty Years of Contingent Valuation. In: Alberini A and Kahn JR (eds.) Handbook on Contingent Valuation, pp. 7–65. Northamption, MA: Edward Elgar. Whitehead J, Haab T, and Huang J-C (eds.) (2011) Preference Data for Environmental Valuation: Combining Revealed and Stated Approaches. New York, NY: Routledge.
Glossary Incentive compatibility The extent to which respondents are encouraged to supply truthful answers to hypothetical questions. Nonuse value The willingness to pay for a policy that is unrelated to changes in behavior. Payment rule A description of the conditions required for the policy to be implemented. Payment vehicle The means of payment in a willingness to pay question. Reliability The extent to which a valuation method consistently generates the same measure.
Overview The contingent valuation method (CVM) is a stated preference approach to the valuation of amenities, recreational, and other behaviors related to environment and natural resources. Preferences are ‘stated’ in the sense that survey respondents are asked hypothetical questions directly about their values for the environment. This is in contrast to revealed preference methods, such as the travel cost method and the hedonic pricing method, for valuing the environment, in which values are revealed by observable individual and household behavior. The CVM differs from other stated preference approaches. The contingent behavior approach employs hypothetical questions about behavior with values estimated using empirical methods of revealed behavior approaches. The choice experiment approach focuses on the marginal valuation of attributes of policy. The CVM is useful for estimating benefits and costs for environmental and natural resource policy analysis and benefit–cost analyses involving nonmarket goods and services. The CVM has been used for major policy analyses associated with the US Clean Water Act, the US Clean Air Act, and the Natural Resource Damage Assessment associated with the Exxon Valdez oil spill. The CVM was first suggested by S.V. Ciriacy-Wantrup in the context of soil erosion policies in 1947. Robert Davis first implemented the CVM in a 1963 study of forest recreation in Maine. Alan Randall, Berry Ives, and Clyde Eastman provided the first published application of the CVM in 1974 focusing on nonuse visibility values in the Four Corners region of the US Southwest. The early development of the CVM was greatly improved by two books. Ronald Cummings, David Brookshire, and William Schulze edited a 1986 volume that arose from a conference that took a critical look at the CVM. Robert Cameron Mitchell and Richard Carson produced a comprehensive book in 1989 that focused on methods to conduct valid and reliable CVM studies. Shortly after Mitchell and Carson, the Exxon Valdez oil spill focused attention on the measurement of
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Stated preference Hypothetical questions that are posed to survey respondents to elicit their values for the environment. Use value The willingness to pay for a policy that is revealed by changes in behavior. Validity The extent to which a valuation method generates a measure that is unbiased. Valuation scenario Survey description of the policy to be valued, the payment vehicle, the policy implementation rule, and the valuation question. Willingness to pay The theoretical construct of economic benefits that contingent valuation questions are designed to measure.
nonuse values with the CVM and the 1990s was an active and often contentious period of research, which is well summarized in a 1996 book edited by David Bjornstad and James Kahn and a 1994 symposium in the Journal of Economic Perspectives. Research was further motivated by the guidelines provided by NOAA Blue Ribbon Panel report on CVM. The early research into the methods for eliciting values was followed by a brief but intense period of research through the 1990s, developing the statistical methods for analysis of CVM data. The standard statistical methods are laid out in the 2002 book by Tim Haab and Ted McConnell. The following decade has been much quieter, with the number of CVM applications rising while the methodological research has slowed. In the rest of this article, the advantages of the CVM, the implementation of the CVM, and the accuracy of the method are all described. Most economists always prefer revealed preference methods for valuation. In that context, the advantages of the CVM include added flexibility and the ability to measure nonuse values and values considering ex ante uncertainty. The CVM requires a survey-based data collection effort beginning with questionnaire design. Attention to writing of the valuation scenario and valuation questions is emphasized. Accuracy of the CVM has long been an issue. Various tests for validity and reliability are also described.
CVM Survey Design The components of a contingent valuation scenario include a description of the resource or policy context, a description of the policy or proposed change in resource allocation that will be valued, a payment vehicle, and a payment rule. Respondent willingness to pay may depend on each of these contextual factors. Although the hypothetical nature of CVM is unavoidable, there are certain guidelines survey designers can follow that will help enhance accuracy. In particular, the scenario must be believable, create limited opportunities for free riding,
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Valuation Tools | Contingent Valuation Method
and respondents must believe that their response will be consequential in determining ultimate implementation of the proposed scenario. CVM surveys must focus on the design of the valuation scenario and valuation questions. But the CVM cannot be implemented without consideration of more general survey issues. CVM surveys are implemented with mail, in-person, telephone, and Internet surveys. Other environmental valuation methods rely on survey data, but the peculiarities of various survey methods may impact stated preference methods, especially CVM and choice experiments, more acutely. For example, CVM and choice experiment scenario descriptions can be more effective with visual aids such as photographs and charts. Telephone surveys preclude visual aids unless the survey is combined with mailed survey booklets. In addition, policy analysis requires aggregation of willingness to pay values and high survey response rates facilitate accurate aggregation. Low survey response rates require consideration of sample nonresponse and sample selection bias. CVM sample design should also consider the extent of the market, the typical negative relationship between willingness to pay and distance, when determining the population over which to sample. The description of the proposed policy should make explicit exactly what is being valued. A concrete scenario description allows each respondent to understand what good or service is obtained in exchange for payment. Scenario descriptions must include the baseline level of environmental quality or natural resource allocation and changes to this baseline. These descriptions must be nonpersuasive and neutral. Scenario descriptions can include photographs, diagrams, maps, and other visual aids with mail, in-person, and Internet survey modes. Survey questions eliciting perceptions about the impacts, the likelihood, and the credibility of the scenario, are necessary in order to confirm respondent understanding of these impacts. The payment vehicle and payment (i.e., policy implementation) rule are closely related. Payment vehicles are the way that respondents would actually pay for the change in resource allocation. Typical payment vehicles include increases in utility bills, increases in taxes, and increases in prices of related goods, user fees, and donations to special funds. The payment vehicle must be realistic, believable, and neutral. The payment rule makes explicit under what conditions the policy will be implemented. For quasi-public goods for which use is excludable, the payment rule is understood as payment of a fee for service or access. Respondents have little incentive to misrepresent their preferences. Payment rules for nonexcludable and nonrival public goods are more complex. Two of these are voluntary contributions and referenda. The payment rule for voluntary contributions is that if donations exceed the program costs, then the program will be recommended for implementation. In this case, respondents have at least a weak incentive to tell the truth. However, subsequent payment is not enforceable. When government tries to collect money for the special fund, they might discover that people free ride. This may cause people who want the policy to overstate their willingness to pay. The policy implementation rule with voluntary contributions is often implicit. If aggregate donations exceed costs, then the policy will be implemented. Incentive compatibility of voluntary donations may be enhanced with provision point and other rules.
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The payment rule with a referendum is majority rule. If 50% or more of respondents vote for the policy, then it will be recommended for implementation. In combination with an involuntary tax payment vehicle, there is little incentive for a respondent to misrepresent his or her preferences. Suppose a hypothetical referendum is expected to influence governmental policy. If a respondent votes for the policy at a tax payment greater than their willingness to pay and the policy is ultimately implemented, then the respondent is worse off. Likewise, the respondent could be worse off after a vote against a policy at a tax payment less than their willingness to pay if that vote influences the policy to be not implemented. Debriefing questions that identify protest responses and elicit perceptions of the valuation scenario are typically used to help better understand respondent preferences. Protest responses are typically zero willingness to pay values or votes against a referendum that reflect rejection of the valuation scenario. For example, respondents may be willing to pay for the policy at the tax level but a lack of trust in government’s ability to successfully implement the policy could lead to a vote against the policy. One debriefing question is about the effectiveness of the policy. Respondents who perceive that the policy is likely to achieve the goals stated in the valuation scenario are more likely to provide valid and reliable willingness to pay estimates. Another debriefing question is to elicit perceptions about the consequentiality of the survey. Consequentiality refers to the perception that the results of the survey could have policy implications. Incentive compatibility is enhanced for all policy implementation rules if respondents believe that the survey is consequential.
Willingness to Pay Question Formats There are a number of different types of willingness to pay valuation questions. Early applications of the CVM asked respondents directly about their willingness to pay devoid of a behavioral context. Many early CVM applications asked the open-ended question: ‘What is the maximum amount of money that you would be willing to pay for the improvement in environmental quality?’ This question has several disadvantages. Being an open-ended question, it is relatively difficult to answer. Respondents must work hard to research their preferences to formulate accurate values. Instead, respondents may adopt simple valuation strategies and anchor responses on digits ending in zero and five. High item-nonresponse rates are also a problem with open-ended questions because the question is unfamiliar to respondents. The open-ended question is also relatively easy to free ride. Respondents might answer ‘zero’ or ‘$1’ even if their other answers indicate that they might have a much higher value. The payment card question asks an open-ended question but provides dollar interval response categories to respondents. Respondents could be given the following response categories: ‘Between $1 and $5,’ ‘Between $5 and $10,’ ‘Between $10 and $15,’ and ‘More than $15.’ Respondents would then indicate the response that most accurately reflects their maximum willingness to pay. A problem is that payment card questions are prone to ‘range bias.’ In the example above, the average willingness to pay will likely be between $1 and $15. If another response category is included, say ‘Between $15 and $20,’ the
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average willingness to pay may rise. The reason is that many survey respondents are very open to suggestion when answering unfamiliar questions. The preferred question format of most CVM practitioners is the close-ended question. The earliest version of the closeended question was the iterative bidding question. Everyone in the sample was asked: “Would you be willing to pay $A for the improvement in environmental quality?” The $A is the starting point. If the respondent answered ‘yes,’ they would be asked the question again with a higher dollar amount. These questions would continue until the respondent answered ‘no.’ If the respondent answered ‘no,’ they would be asked the question again with a lower dollar amount until the respondent answered ‘yes.’ The iteration could continue until willingness to pay is narrowed down to the dollar. The result is a continuous measure of willingness to pay obtained from relatively easy to answer questions that are more difficult to free ride. The cost of iterative bidding is starting point bias. If the starting point is $5, the average willingness to pay amount ends up lower than if the starting point is $25. The dichotomous choice question has become the dominant form of CVM question. The dichotomous choice question is similar to the initial iterative bidding question with two differences: (1) the starting point is varied across survey respondents and (2) the starting point is the ending point (i.e., there are no follow-up willingness to pay). The advantage of the dichotomous choice question is that each respondent is asked a single valuation question that is relatively easy to answer. The major disadvantage is that the CVM researcher only learns whether each respondent’s willingness to pay is above or below the dollar amount threshold. More sophisticated econometric methods are necessary to develop an average willingness to pay amount. Even then, the variance on average willingness to pay tends to be large relative to valuation questions that produce continuous willingness to pay distributions. Another disadvantage is that larger samples are necessary to implement the dichotomous choice approach. For each dollar amount version included in the experimental design, researchers need a large sample (about a minimum of 40) for statistical purposes. The double-bounded approach adds one follow-up question to the single-bound dichotomous choice question. If the respondent answers ‘yes’ to the first question then the dollar amount is increased, typically doubled, and the question is asked again. If the respondent answers ‘no,’ then willingness to pay is bounded between the dollar amounts. If the respondent initially answers ‘no,’ then the dollar amount is reduced (typically halved), and the question is asked again. Respondents are distributed across four groups: ‘yes, yes,’ ‘yes, no,’ ‘no, yes,’ and ‘no, no.’ An extension of the double-bounded valuation question is iterative bidding with a random start. ‘Yes, yes’ and ‘no, no’ respondents are asked more follow-up questions until their willingness to pay value actually has upper and lower bounds. The benefit of the multiple bounds is that the variance of the willingness to pay estimate may be further reduced. The disadvantage is, again, the potential for starting point bias. The benefit of the follow-up question is that analysis of these data substantially reduces the variance of the average willingness to pay estimate. A disadvantage is that the responses to the follow-up questions might lead to willingness to pay estimates that differ from the willingness to pay
estimates from the first valuation question. In other words, the follow-up questions may also be prone to a form of starting point bias. In addition, behavioral researchers have found that responses to follow-up questions tend to come from different psychological motivations than the initial response and follow-up questions may not be incentive compatible. CVM researchers have also experimented with including more response categories to the close-ended valuation question. The most practical category to include is ‘don’t know’ in addition to the standard yes/no options, a trichotomous choice. Polychotomous choice questions might include variations of the yes/no answer to indicate respondent uncertainty by adding categories such as ‘definitely yes,’ ‘probably yes,’ ‘probably no,’ and ‘definitely no.’ These questions supply useful information about respondent preferences. Another form of multiple-bounded valuation questions is a combination of the payment card and polychotomous choice question. In this visual question format, a wide range of dollar amounts are offered in the first column and respondents are asked to state their willingness to pay each amount by checking boxes in columns expressing various levels of certainty. The cost is the unfamiliarity of the valuation exercise for respondents. In a single-column ‘payment ladder’ variation, respondents may indicate all of the lower values that they would certainly pay and all of the higher values they certainly would not pay. The benefit of the multiple-bounded approach is the expression of uncertainty and the multiple observations for each respondent, which increases econometric efficiency.
Willingness to Accept For many public goods, the implicit property right of the good is held by society or the government, that is, someone other than the respondent. In this case it is appropriate to ask a willingness to pay question, which is essentially: “how much would you give up in order to obtain something that someone else currently owns?” The willingness to pay question does not change the implicit property rights of the resource. For some types of policy, however, the respondent holds the implicit property right and the willingness to pay question changes the property rights. This complicates the valuation process if the change in the property rights has an effect on the estimated value of the good through protest responses. Another approach is to ask a willingness to accept question: “would you be willing to accept $A for a decrease in environmental quality?” The willingness to accept question does not alter the implicit property rights. When income effects are small (i.e., small willingness to accept and small willingness to pay), willingness to pay will be a close approximation of willingness to accept. Considering the indifference curves implied by the comparison of the indirect utility functions in income and quality space, a sufficient amount of compensation of income (i.e., market goods) would leave the respondent no worse off as before the decrement in the public good. For a private good, for which there are good substitutes, willingness to accept and willingness to pay should not be different. Willingness to accept may exceed willingness to pay because willingness to accept for a public good has few good substitutes and is not income constrained. Although the divergence can be theoretically understood, in application, the
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willingness to accept question can be problematic. A number of empirical comparisons find, however, that willingness to accept significantly exceeds willingness to pay even with small income effects. Willingness to accept questions often generate a large number of values that do not conform to consumer theory. Primarily out of convenience, willingness to pay questions have been used when the willingness to accept question is theoretically more appropriate. In the context of policy analysis, using the willingness to pay in place of the willingness to accept question provides a conservative estimate of willingness to accept.
Advantages of the CVM The CVM is firmly grounded in welfare economic theory. Respondents are assumed to answer contingent valuation questions based on the value they place on the policy or programs. In short, it is assumed that survey respondents choose their response to a hypothetical value elicitation scenario as if they are facing a real and consequential choice. Respondents will choose the response that maximizes their own satisfaction (utility) subject to budgetary considerations. Maximization of utility subject to the income constraint yields the indirect utility function, which depends on prices of market goods, income, and public goods. Willingness to pay for changes in a public good is thus the difference in income necessary for the respondent to be indifferent between the status quo and the change in the allocation of the public good, its quality, or access price. Alternatively, responses to CVM value elicitation questions can be supposed to derive from respondents’ desire to minimize the monetary outlay necessary to maintain a reference level of satisfaction. The minimization of expenditures subject to the utility constraint leads to the expenditure function. In the expenditure function format, respondents directly express their willingness to pay for improvements to prevent degradation of the conditions leading to the baseline utility. Willingness to pay is the difference between status quo expenditures and expenditures with the change in the allocation of the public good, its quality, or access price.
Flexibility Relative to the revealed preference methods, the CVM is the most flexible valuation approach available to policy analysts. For example, the most popular revealed preference method, the travel cost method, is largely focused on the valuation of outdoor recreation trips and quality attributes of the visited recreation sites. The travel cost method relies on observable variation in site quality to shift the observed demand for recreation trips. While seated in observed quantities, the travel cost method is constrained by the range of observed quality variation, which is often inadequate for the valuation of the large quality changes demanded by policy. The hedonic pricing method is typically limited to analysis of labor, housing, and automobile markets because in other markets data are usually unobtainable for prices and observable characteristics that are useful for public policy analysis. These markets are presumed to react efficiently to changes in public goods and fully reflect the value of these changes
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through equilibrium price adjustments. Because public good changes affect entire markets with limited differential impact on market participants, the valuation of discrete changes in public goods requires observations from multiple markets or alternatively requires statistical manipulation to derive the full value of any significant change in magnitude. The averting behavior approach, which relies on the observation of defensive actions taken by consumers to avoid health impacts, focuses mainly on the health effects of air and water quality and safety effects of protection equipment. The approach is primarily constrained by the lack of variation in environmental quality and the discrete nature of the decisions. Revealed preference methods are constrained to quasipublic goods. Quasi-public goods are those for which the environmental good is a characteristic of a market good. The Hicksian, or compensated, demand for the market good is the first derivative of the expenditure function with respect to the price of the quasi-public good. If environmental quality is a characteristic of recreation behavior, the demand will move in the same direction as the change in environmental quality. Revealed preference methods require that the observed demand for the market good be estimated and then the effect of the environmental quality on the market good must be isolated. If these two empirical conditions are satisfied, the revealed preference method can be used to estimate a close approximation to use value, the uncompensated consumer surplus (non-Hicksian), resulting from the change in the quasi-public good. In contrast, most quasi-public goods, for which there are implicit markets for comparison, and pure public goods, for which no implicit market exists, are within the domain of CVM applicability. The only constraint that application of the CVM imposes is that a realistic valuation scenario must be constructed around payment and delivery of the change in environmental quality. Where revealed preference methods are constrained to the realm of observable quality changes. Realistic policy analysis often requires valuation beyond the observable range; for example, restoration of environmental quality to levels not observed within the respondent’s lifetime. The CVM obviates the need for observation and introduces the flexibility to value wide ranges of quality changes. This flexibility extends to the valuation of projects of different scopes. Multiple valuation questions can be used to estimate the value of the incremental benefits of a project to determine the scope at which the net benefits are maximized. Most applications of the implicit market methods are limited to simulated changes in scope and the validity of these simulations for large changes are tenuous due to nonlinearities and other complications. In addition, the other stated preference methods are limited by the necessity of framing the hypothetical question in the appropriate behavioral context. The contingent behavior approach relies on asking respondents their anticipated behavioral response to hypothetical changes in public good attributes. Choice experiments are constrained by development of realistic combinations of attributes of alternatives.
Nonuse Values Beyond flexibility, stated preference methods offer advantages over revealed preference methods in the types of values that can be measured. Willingness to pay is the total value of a
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policy change and can be decomposed into use and nonuse values. For example, suppose that the change in environmental quality is realized while use of the market good related to environmental quality is restricted to zero. The nonuse value of the policy change is equal to the change in expenditure functions with use of the good constrained to zero. Stated preference methods, and especially the CVM, are the only methods available for measuring the economic value of policy for people who do not experience the changes resulting from policy directly. Direct changes might be experienced through on-site recreation, changes on the job, changes in the neighborhood of residence, or through changes in one’s own health. For some policies, nonuse values may exist but their contribution to total value is not substantial. In these cases, revealed preference methods may be sufficient. However, for some policies ignoring the measurement of nonuse values would lead to significant errors in policy analysis. The problem of failing to observe values when use is zero goes beyond the practical. In most formulations, revealed preference theory requires the weak complementarity assumption. In order for the change in demand for the good to represent a valid measure of the value of the change in the public good, consumers are assumed to receive no utility change from the quasi-public good change when the associated good is not consumed. In other words, not only are revealed preference methods incapable of measuring nonuse values, the research often assumes that nonuse values do not exist in order to validate the values estimated from revealed preferences. Willingness to pay questions, as derived through the CVM, tend to elicit the total economic value. The nonuse value can be elicited from survey respondents in several ways. One approach is that the willingness to pay question would elicit total value as usual from current users and current nonusers of the resource. The limitation of this approach is that environmental quality improvements can lead nonusers to become users. In this situation, revealed behavior and contingent behavior questions could be used to determine use of the resource with and without the policy. If use of the resource changes with the policy, use values can be estimated and then compared to the total value. The residual between total and use values is an estimate of the nonuse value. Some policies will not affect use of the resource. Then the entire willingness to pay value is the nonuse value.
Valuation Under Uncertainty Ex post measures of value can incorporate uncertainty by assigning probabilities to different outcomes. The sum of the probability weighted ex post willingness to pay amounts from revealed preference methods yields expected surplus. For policies and projects that involve significant uncertainty, the appropriate measure of the impacts of policy is an ex ante measure. The option price is the ex ante willingness to pay measured before the uncertainty is resolved. Any willingness to pay estimate elicited from CVM can be interpreted as an option price, regardless of whether the analyst explicitly incorporates uncertainty in the willingness to pay questions or theoretically or empirically models the uncertainty. This is so because contingent valuation respondents will answer willingness to pay questions after considering all the uncertainties that they are aware of at the time.
In order to define willingness to pay under uncertainty, consider a policy that may yield two probabilistic outcomes where the probabilities sum to one. The expected surplus of the policy is the sure payment regardless of which outcome is realized. The sure payment is the willingness to pay values under each outcome weighted by the probabilities. The expected surplus is an ex post measure of benefits and can be estimated with the revealed preference methods. The option price is the ex ante willingness to pay for the increment before the uncertainty is resolved. It is the amount of money that must be subtracted from income so that the sum of the probability weighted utility functions are equal to utility under the status quo. In the case of supply uncertainty, willingness to pay questions could explicitly describe the various uncertainties before the valuation question is presented. Respondents would then incorporate the uncertainty into their response. Subjective demand probabilities can be directly elicited from respondents before or after the valuation question is presented. Another approach is to estimate demand probabilities from revealed behavior. While under certain restrictive conditions it is feasible to estimate the option price with revealed preference methods, the CVM is the only approach that can estimate the option price with incorporation of variation in demand and supply probabilities. One problem encountered in estimating willingness to pay under uncertainty is the failure of respondents to understand risk and probabilities. Understanding is especially challenging when probabilities are low, such as when estimating the value of small changes in mortality risks. While this has been a problem in a number of studies, reviews and comparison studies indicate that the CVM estimates of the value of risk reductions tend to fall in the range of the estimates from labor market and averting behavior studies.
Accuracy As the CVM is based on responses to hypothetical valuation questions, there have been concerns about the accuracy of value estimates. Accuracy of a measure of a theoretical construct (e.g., willingness to pay) is comprised of validity and reliability. Validity is the extent to which a valuation method generates a measure that is unbiased, that is, provides an estimate centered around the true value, if it were known. Reliability is the extent to which a valuation method consistently generates the same measure. While reliability can often be demonstrated through repetition and replication, validity is more difficult to demonstrate when valuing nonmarket goods and services. By their nature, the ‘true’ value of nonmarket goods and services are unknown. A valid method for estimating these values is thus attempting to provide an unbiased estimate around an unknown and unobservable quantity. It is important that CVM studies demonstrate some degree of both validity and reliability.
Validity There are several types of validity that have been considered in the contingent valuation literature. Criterion validity is the extent that the measure of hypothetical willingness to pay
Valuation Tools | Contingent Valuation Method
compares favorably to another measure of the theoretical construct that is considered valid (e.g., actual willingness to pay). Convergent validity is the extent that a measure is correlated with a similar measure of the same underlying theoretical construct. Theoretical, or internal, validity is the extent to which a measure changes in expected ways with changes in variables related to the measure. In addition to these, all contingent valuation studies should be assessed on their face validity – the extent to which the survey instrument and valuation scenario measures the underlying theoretical construct of willingness to pay. One of the more persistent empirical results in the CVM literature is the tendency for hypothetical willingness to pay values to overestimate real willingness to pay values (i.e., actual payment). In other words, CVM tends to fail criterion validity tests. In general, survey respondents tend to state that they will pay for a good when in fact they will not, or they will actually pay less, when placed in a similar purchase decision. This result has been found in a variety of applications including private goods and public goods. One cause is that the ceteris paribus condition does not hold between the actual and hypothetical scenarios. Willingness to pay statements are behavioral intentions and actual payment is revealed behavior. Respondents in a hypothetical scenario may expect that more income or time will be available when the situation described in the hypothetical scenario will actually occur. Current income and time constraints are not necessarily binding in the survey setting and the behavioral intentions will be overstated, relative to the current time period. Research has attempted to empirically discover the source of the overstatement of willingness to pay and develop question formats or survey adjustments that minimize the overstatement. Several researchers find that the divergence between hypothetical and real willingness pay is mitigated or eliminated, by providing additional instructions to respondents encouraging them to carefully consider their budget constraints, substitutes, and to treat the hypothetical scenario as if an actual monetary transaction were taking place. Such ‘cheap talk’ methods have proven somewhat effective in establishing the criterion validity of CVM. Other researchers find that hypothetical willingness to pay is similar to actual willingness to pay when the level of certainty respondents have about making payment is taken into account. Significant evidence exists that the more certain or confident respondents are they would make payment if payment were transacted, the greater the criterion validity. Another approach to understanding criterion validity is an investigation of the incentive compatibility of different question formats. There are theoretical reasons why hypothetical market results tend to generate the divergence in hypothetical and real willingness to pay. Scenarios that involve the provision of public goods with a voluntary contribution format and the purchase of private goods could be expected to lead to overstatements of hypothetical willingness to pay. Respondents, when considering a public good with individual policy costs and a referendum vote, will tend to truthfully reveal their willingness to pay if they believe their votes will ultimately impact a decision to implement the project. If respondents believe that there is some nonnegligible probability that the project will be implemented if the hypothetical referendum
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passes, then, at least in theory, incentives exist for truthful revelation of willingness to pay. The exact probability of implementation that leads to consequentiality is an unanswered empirical question. One approach for establishing convergent validity is through a valuation comparison study in which theoretically similar valuation estimates from two or more methodologies, such as CVM and the travel cost method, are compared. Estimates that are statistically similar (i.e., overlapping confidence intervals) achieve convergent validity increasing the confidence in both valuation estimates. There is some consensus that CVM can achieve convergent validity with other methods. However, convergent validity tests between stated and revealed preference methods suffer from a potential logical dilemma because stated and revealed methods measure potentially different values (e.g., total value vs. use value), convergence between values across methods may be evidence of validity, but divergence between values is not necessarily evidence of invalidity. The divergence may simply be different methods measuring different values with no ‘truth’ to establish the valid measure for comparison. A more rigorous approach to convergent validity is the combination and joint estimation of stated and revealed preference data. Rather than use stated and revealed preference methods as competing methods for achieving the same ends, the methods can be combined within the framework of a common preference construct and then tested for consistency within that framework. Joint estimation uses alternative methods to limit the critical flaws of each. For example, joint estimation employs stated preference data that goes beyond the range of historical experience, while grounding the estimates in the reality of revealed preference data. Despite the potential gains of using multiple methods to limit the drawbacks of any particular method, the majority of the empirical evidence suggests that revealed and stated preference data fail consistency tests. However, that has not stopped researchers from continuing to develop advanced empirical methods to impose consistency on the data and exploit the complementarities in the data. Theoretical validity is the extent to which a valuation measure changes in response to the changes in conditions under which it is evaluated. Theoretical validity is also known as internal validity because the tests conducted are internal to the data. Theoretical validity tests begin with economic theory. Comparative static results are derived from the willingness to pay function as derived from the assumed underlying preference structure. For example, willingness to pay can be shown to decrease with own-price, increase or decrease with price of substitutes or complements, and increase with income (for normal goods). The bulk of the evidence finds that willingness to pay estimates are theoretically valid to some extent. Following the NOAA guidelines, the so-called scope test has taken on extra significance. Sensitivity to the scope of the resource allocation change exists if willingness to pay is nondecreasing in quality or quantity. The empirical research on scope is mixed and provides plenty of room for continuing investigation. Related, tests for multipart policy can indicate substitute and complementary relationships between policy components. Valued independently, the sum of willingness to pay for two policies is greater than willingness to pay for
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Valuation Tools | Contingent Valuation Method
the two policies valued jointly if the policies are substitutes. In the context of the scope test, willingness to pay for the jointly valued policies should be greater than independent valuation of either policy.
Reliability Reliability is the extent that willingness to pay is nonrandom. Reliability tests focus on the within and across study variation in estimates rather than the ability of studies to accurately measure unbiased value. The lower the variability in estimates, the more consistent those estimates are and the less influenced by researcher decisions. High variability leads to the ability of practitioners to significantly influence results in one direction or another. Unreliable results are indefensible against the criticism that the researcher is determining the result. There are several tests for reliability of the CVM including econometric, test–retest, and alternative form reliability. Econometric reliability is the ability to explain the variation in willingness to pay through observable variables included in the econometric specification. Test–retest reliability is the consistency of willingness to pay estimated at two different times. Alternative form reliability is the consistency of willingness to pay across different forms of the valuation question. Econometric reliability can be tested with statistical measures of overall fit of a regression model. In a least squares regression model, a significant F statistic is a measure of reliability. In a limited dependent variable model, a significant chi-squared statistic is a measure of reliability. Econometric reliability proves difficult to establish because the preferred behavioral question format (dichotomous choice) is the least reliable format econometrically. The limited information collected from a dichotomous choice question – willingness to pay is either above or below a randomly assigned threshold – necessarily increases the statistical variability in willingness to pay estimates. Econometric variability can be reduced through the collection of more responses from each respondent, increasing sample size or through the use of alternative question formats. Test–retest, or temporal, reliability involves conducting more than one CVM survey with time between surveys. The time period could be 1 month, 1 year, or more. If the magnitude of willingness to pay is consistent across time, then willingness to pay is considered temporally reliable. Consistency in factors affecting willingness over time is also evidence of temporal reliability. However, a temporal difference in willingness to pay does not necessarily indicate unreliable results. If willingness to pay changes over time in response to changing factors that affect willingness to pay, then the researcher may conclude reliability. Alternative form reliability can be examined with different forms of the valuation question or by asking about willingness to pay in a lump sum or a series of payments. Comparisons of referendum and payment card willingness to pay, for example, that yield similar estimates leads to conclusions of reliability. However, given the different incentives embedded in different valuation questions, differences in willingness to pay in expected directions can be used as evidence of reliability. Most contingent valuation applications elicit a series of payments assuming the current period budget constrains the
willingness to pay. An alternative is to assume that respondents are constrained by their lifetime wealth and elicit a lump-sum payment. In this case, the respondent would apply his or her own rate of time preference to the project and state the present value of willingness to pay. If the average of the individual rates of time preferences is equal to the social discount rate the two approaches should yield the same willingness to pay amount. However, there is some evidence that respondents answer lump-sum willingness to pay questions with an unrealistically high implicit discount rate.
Conclusions The CVM is a highly flexible and relatively simple method for the estimation of values for goods and services not otherwise valued in traditional markets. However, the flexibility and simplicity of CVM come at a high cost. In its most basic form, CVM is a method for asking people what they would be willing to pay. Because anyone can ask a valuation question, CVM studies of high and low quality proliferate. Critics of CVM point to the hypothetical nature of the questions, the ability of practitioners to influence results through question format , econometric manipulation, and the often conflicting results on tests of validity as evidence of the inadmissibility of CVMderived values into policy analysis. The challenge for CVM practitioners is to thoroughly understand not only the flexibility of the method but also its limitations and avoid the traps of simplicity. While simple to implement, the defense of CVM-derived values and the defense of the method itself are far from simple.
See also: Allocation Tools: Environmental Cost-Benefit Analysis.
Further Reading Alberini A and Kahn JR (eds.) (2006) Handbook on Contingent Valuation. Northamption, MA: Edward Elgar. Bateman IJ and Willis KG (eds.) (2001) Valuing Environmental Preferences: Theory and Practice of the Contingent Valuation Method in the US, EU and Developing Countries. New York, NY: Oxford University Press. Bjornstad DJ and Kahn JR (eds.) (1996) The Contingent Valuation of Environmental Resources: Methodological Issues and Research Needs. Brookfield, VT: Edward Elgar. Carson RT and Groves T (2007) Incentive and informational properties of preference questions. Environmental and Resource Economics 37: 181–210. Carson RT and Mitchell RC (1993) The value of clean water: The public’s willingness to pay for boatable, fishable, and swimmable quality water. Water Resources Research 29: 2445–2454. Carson RT, Mitchell RC, Hanemann M, Kopp RJ, Presser S, and Ruud PA (2003) Contingent valuation and lost passive use: Damages from the Exxon Valdez oil spill. Environmental and Resource Economics 25: 257–286. Cummings RG, Brookshire DS, and Schultze WD (eds.) (1986) Valuing Environmental Goods: An Assessment of the Contingent Valuation Method. Totowa, NJ: Rowman & Allanheld. Diamond PA and Hausman JA (1994) Contingent valuation: Is some number better than no number? Journal of Economic Perspectives 8: 45–64. Haab TC and McConnell KE (2002) Valuing Environmental and Natural Resources: The Econometrics of Non-Market Valuation. Northampton, MA: Edward Elgar. Hanemann WM (1994) Valuating the environment through contingent valuation. Journal of Economic Perspectives 8: 19–43.
Valuation Tools | Contingent Valuation Method
Loomis JL (2011) What’s to know about hypothetical bias in stated preference valuation studies? Journal of Economic Surveys 25: 363–370. Mitchell RC and Carson RT (1989) Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington, DC: Resources for the Future. Portney PR (1994) The contingent valuation debate: Why economists should care. Journal of Economic Perspectives 8: 3–17.
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Smith VK (2006) Fifty Years of Contingent Valuation. In: Alberini A and Kahn JR (eds.) Handbook on Contingent Valuation, pp. 7–65. Northamption, MA: Edward Elgar. Whitehead J, Haab T, and Huang J-C (eds.) (2011) Preference Data for Environmental Valuation: Combining Revealed and Stated Approaches. New York, NY: Routledge.