Chapter 17 Contingent Valuation

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Abstract

Value estimates for environmental goods can be obtained by either estimating preference parameters as “revealed” through behavior related to some aspect of the amenity or using “stated” information concerning preferences for the good. In the environmental economics literature the stated preference approach has come to be known as “contingent valuation” as the “valuation” estimated obtained from preference information given the respondent is said to be “contingent” on the details of the “constructed market” for the environmental good put forth in the survey.

Work on contingent valuation now typically comprises the largest single group of papers at major environmental economics conferences and in several of the leading journals in the field. As such, it is impossible to “review” the literature per se or even cover all of the major papers in the area in some detail. Instead, in this chapter we seek to provide a coherent overview of the main issues and how they fit together.

The organization of the chapter is as follows. First, we provide an overview of the history of contingent valuation starting with its antecedents and foundational papers and then trace its subsequent development using several broad themes. Second, we put forth the theoretical foundations of contingent valuation with particular emphasis on ties to standard measures of economic welfare. Third, we look at the issue of existence/passive use considerations. Fourth, we consider the relationship of contingent valuation to information on preferences that can be obtained by observing revealed behavior and how the two sources of information might be combined. Fifth, we look at different ways in which preference information can be elicited in a CV survey, paying particular attention to the incentive structure posed by different elicitation formats. Sixth, we turn to econometric issues associated with these different elicitation formats. Seventh, we briefly consider survey design issues. Eighth, we look at issues related to survey administration and extrapolating the results obtained to the population of interest. Ninth, we describe the major controversies related to the use of contingent valuation and summarize the evidence. Finally, we provide some thoughts on where we think contingent valuation is headed in the future.

Introduction

Few environmental goods are bought and sold in the marketplace. For economists to move beyond an analysis of the cost-effectiveness of providing a specified level of a particular environmental good it is necessary to have some way of estimating the value of providing different levels of the amenity relative to its cost. Such values are most naturally expressed in monetary terms although other metrics are possible. These value estimates can be obtained by either estimating preference parameters as “revealed” through behavior related to some aspect of the amenity or using “stated” information concerning preferences for the good. In the environmental economics literature the stated preference approach has come to be known as “contingent valuation,” as the “valuation” estimate obtained from preference information given that the respondent is said to be “contingent” on the details of the “constructed market” for the environmental good put forth in the survey.2 The focus of this chapter is on contingent valuation (CV).

Contingent valuation is an inherently more flexible tool than revealed preference techniques such as hedonic pricing and the household production function approach. This is because it is possible in principle to use CV to examine environmental goods and terms for providing them that are different from what has been observed now or in the past. It is also possible in principle to create CV scenario experiments that avoid many of the economic modeling problems that are common to most observational data. Contingent valuation is also the only approach that can generally be used to include what is usually referred to as the existence or passive use component of the economic value of an environmental good. Offsetting these advantages are the problems that can arise with surveys and the reluctance by some economists to rely on information obtained from surveys. Such reluctance, however, is not neutral in terms of its consequences for policymaking.

Rather than seeing an inherent conflict between revealed and stated preference techniques, it is more productive to view the two approaches as complementary but having different strengths and weaknesses. Indeed, it is sometimes possible and useful to combine the two approaches.

The great advantage of the revealed preference approach is, of course, that it is based on actual behavior. The difficulty is that the tie between that behavior and the environmental good of interest is often complex and estimation of the implied economic value placed on a change in the environmental good is highly dependent upon both the underlying theoretical model postulated and the nature of the econometric assumptions made. Less frequently recognized is that the observed behavior takes place in the context of a particular market structure that may be substantially different from that in which the policy change is going to occur.

Contingent valuation has the opposite set of characteristics. The tie between the underlying theoretical model and the information on preferences obtained in the survey is usually quite close. There are, of course, econometric assumptions to be made but these tend to be different in nature and relate to aspects of the distribution of economic values and the nature of the survey data collection effort.

CV surveys differ from other surveys on public policy issues in several important ways. First, a major portion of the survey is devoted to a description of the public good (or goods) of interest. Second, the elicitation of preference for the good is more extensive and nuanced than in a typical opinion survey. Moreover, it involves the elicitation of monetary (Hicksian) measure of welfare: maximum willingness-to-pay (WTP) to obtain a desired good not currently possessed, or minimum compensation (WTA) to voluntarily give up a good currently possessed. CV surveys have been used to value large discrete changes such as the introduction of a new public good, the value associated with substituting one good for another, or the marginal value associated with changing one or more attributes of an existing good. CV surveys are generally organized in the following manner which reflects current practice: (1) an introductory section identifying the sponsor and general topic, (2) a section asking questions concerning prior knowledge about the good and attitudes toward it, (3) the presentation of the CV scenario including what the project was designed to accomplish, how it would be implemented and paid for, and what will happen under the current status quo situation if the project were not implemented, (4) question(s) asking for information about the respondent's WTP/WTA for the good, (5) debriefing questions to help ascertain how well respondents understood the scenario, and (6) demographic questions. Mitchell and Carson (1989) provide a comprehensive overview of the issues involved in the design and analysis of CV surveys, and Bateman et al. (2002) provide a useful manual for the practitioner.

In spite of the apparent simplicity that some see in asking people whether they would be willing to pay some specific amount for a given item, contingent valuation has its drawbacks with regard to providing useful information for policymakers. Much of this stems from the fact that economists are not generally trained in the design and administration of surveys. Indeed, much of the usefulness of conducting a CV study has nothing to do with explicitly obtaining an estimate of monetary value.

There is often not adequate awareness among policymakers and many economists that the choice of the characteristics of the market constructed in the survey can, and generally does, influence the nature of the economic valuation estimates obtained. In this sense, the flexibility of contingent valuation is both a blessing and a curse in that, unless adequate attention is paid, it is possible to obtain estimates that are not directly tied to the relevant policy changes being considered by decision makers. A good CV survey lays out the current status quo level of the good of interest and the potential change in that level, the manner in which that change could be supplied, and how it would be paid for by the agent if supplied. It does so in a way that is both acceptable to the technical experts at governmental agencies and understandable to the general public. This brief description of the initial product of a CV study should also make clear that what is typically being valued is a program to provide the environmental good and not the environmental good alone.

The empirical results from a CV study provide a wealth of information about the population of interest's value of the program. Some of this is in the form of aggregate information, such as the aggregate of WTP used in neoclassical benefit–cost analysis or a summary statistic like median WTP (which has a well-known voting interpretation). Contingent valuation itself is agnostic as to the appropriate summary measure that decision makers should use. Contingent valuation studies generally generate information about the broad shape of the WTP (or WTA) distribution and typically information on how that distribution varies with respondent characteristics such as, income, geographic location, and the nature of the use of the environmental good. The nature of this heterogeneity in economic values is often of great importance to decision makers and explaining it is a key task in a CV study.

It is hard to overestimate the central importance of contingent valuation to modern environmental economics. Work on contingent valuation now typically comprises the largest single group of papers at major environmental economics conferences and in several of the leading journals in the field. Carson (in press) provides a bibliography spanning fifty years with over six thousand CV papers and studies from over one hundred countries. As such, it is impossible to “review” the literature per se or even cover all of the major papers in the area in any detail. Instead, we seek to provide a coherent overview of the main issues and how they fit together.

The vastness of the literature on contingent valuation also suggests another point that cannot be made too strongly. Contingent valuation is a generic approach to collecting survey information about agents' preferences in the context of a constructed market situation. It is impossible to make any valid general statement about the properties of contingent valuation without specifying more completely the nature of the application and the quality of its implementation. And, it is impossible for a single experiment or statistical test to say anything of substantial generality concerning contingent valuation [Randall (1998)]. Such tests, however, may be quite informative as to the properties of a particular type of CV application in a particular context.

The organization of this chapter is as follows. First, we provide a historical overview of contingent valuation starting with its antecedents and foundational papers and then trace its subsequent development using several broad themes. Second, we put forth the theoretical foundations of contingent valuation with particular emphasis on ties to standard measures of economic welfare and specification of models. Third, we look at types of value including issues concerning existence/passive use considerations and consider the relationship of CV to information on preferences that can be obtained by observing revealed behavior. Fourth, we look at different ways in which preference information can be elicited in a CV survey, paying particular attention to the incentive structure posed by different elicitation formats. Fifth, we turn to econometric issues associated with these different elicitation formats. Sixth, we briefly consider survey design issues. Seventh, we look at issues related to survey administration and extrapolating the results obtained to the population of interest. Eighth, we describe the major controversies related to the use of contingent valuation and summarize the evidence. Ninth, we look at the consistent of CV results with actual behavior. Finally, we provide some thoughts on where we think contingent valuation is headed in the future.

Section snippets

Antecedents and beginnings

Even though economists have largely focused on market prices as the indicator of economic value, earlier writers such as Clark (1915) and Hines (1951) clearly saw that much of an individual's utility was driven by unpaid costs and uncollected benefits and that “market prices” did not exist for many of the more interesting quantities to economists. A theory of public goods developed through the work of economists such as Lindahl helped formalize the notion of an equilibrium set of shadow prices

Economic welfare measures

Since CV uses surveys to measure an economic concept of value, we begin a brief review of the relevant economic theory (see Chapter 12 by Bockstael and Freeman in this handbook for a more detailed treatment).

The goal of a CV study is to measure an individual's monetary value for some item. We denote the item being valued by q; for now we will treat this as a single item – whether a single commodity or a single program involving some mix of commodities treated as a fixed group – and therefore q

Types of value/motives for valuation

So far we have made no assumption about the individual's motive for valuing q, or the nature of this value; whatever the reason why she cares for q, if she does care, this is reflected in her direct and indirect utility functions u(x,q) and v(p,q,y). In fact, the literature has developed an extensive set of potential motives and potential types of value Mitchell and Carson, 1989, Carson, Flores and Mitchell, 1999. The standard typology distinguishes between existence value, bequest value,

Elicitation formats for stated preference information

Originally, economists tended to take one of two positions with regard to surveys (see Section 2): either survey respondents tell the truth, in which case useful information can could be obtained from surveys, or they strategically misrepresent their preferences, in which case no useful information can be obtained. This all-or-nothing stance led to a paralysis among economists seeking to measure preferences using surveys until the empirical breakthrough by Davis (1963a) which produced

Structure of WTP distributions

The key output of a CV study is an estimate of the WTP distribution for the good of interest.107 From Section 3, two approaches are possible. One can adopt a

Survey design

The valuation scenario presented in the survey instrument lies at the heart of any CV study. The scenario must convey the change in the good to be valued, how that change would come about, how it would be paid for, and the larger context that is relevant for considering the change. It must do this in a way that is consistent with the underlying scientific/engineering reality and yet still be comprehensible to respondents who may know little or nothing about the good in question. The respondent

Defining the population of interest

In much of economic analysis, the issue of defining the relevant population is routinely ignored because it is assumed to be obvious; in other words, those in the marketplace who buy the good of interest. The question of the relevant population becomes difficult, however, once it is asked: who are potential buyers of a good in a market or users of a government service under a different set of circumstances?142

Consistency of CV results with theoretical prediction

There are a number of interesting issues that CV results have raised about neoclassical economic theory which have prompted extensions or clarifications of that theory. CV surveys have sometimes revealed violations of neoclassical economic theory; however, similar violations can also be found in consumer behavior in actual markets. CV raises issues of incentive structures that are largely ignored in the conventional analysis of consumer demand but which dominate much of contemporary game

Consistency of CV results with actual behavior

Distrust of survey results often leads economists down the path of asking “How do CV results correspond with actual behavior?” A little reflection here, however, suggests that the question is ill-posed, at least to the extent that asking this question usually implies that a divergence would indicate a problem with CV. Ideally, one would like to see CV estimates consistent with actual behavior when theory suggest they should be consistent and divergent when theory suggest that they should be

Concluding remarks

After over twenty-five years of working on CV from both a theoretical and empirical perspective, we are struck by one key insight – there is nothing particularly unique about CV. Once one realizes that responses to consequential surveys represent economic behavior in the standard sense that economist think about, then much of the previously troubling differences between different ways of eliciting preference information and the differences observed across different types of goods and contexts

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