Transcript Contingent valuation method (CVM)

Stated-preference methods
Outline
• Contingent valuation method: overview and
criticisms
• Davao study
• Lessons of experience with CVM in
developing countries
Readings
• Lesser et al., pp. 282-296
• Choe, Whittington, Lauria
Stated preference methods
• Simplest method: contingent valuation method
(CVM)
– Involves a single good
– Individuals are asked to state their maximum WTP or
minimum WTA for a change in the good
– If individuals answer truthfully, their answers will
exactly correspond to the utility change
Stated preference methods
• Simplest method: contingent valuation method
(CVM)
– Involves a single good
– Individuals are asked to state their maximum WTP or
minimum WTA for a change in the good
– If individuals answer truthfully, their answers will
exactly correspond to the utility change
• More complex methods involve multiple goods, or
multiple attributes of single goods
– Choice modeling
CVM
•
•
•
Is survey-based
Often termed a “direct” valuation method,
since which individuals are asked to state
directly their WTP to obtain an
environmental benefit or their WTA to
tolerate an environmental cost
“Contingent”: valuation is dependent on a
hypothetical scenario put to respondents
Example: improved water supply
in Romania
• Like all countries in the former Eastern Bloc,
Romania began the transition to a market-based
economy burdened by unreliable municipal
environmental services: water supply, sewerage,
solid waste disposal
Example: improved water supply
in Romania
• Like all countries in the former Eastern Bloc,
Romania began the transition to a market-based
economy burdened by unreliable municipal
environmental services: water supply, sewerage,
solid waste disposal
• Central planners had designed municipal services
without taking households’ preferences into
account
– Not surprisingly, many households were dissatisfied
– With democratization, they began demanding
improvements
• In mid-1990s, Harvard Institute for International
Development (HIID) conducted a contingent
valuation study in Iasi, an industrial city of
350,000 near the Moldovan border
– Objective: to determine households’ willingness to pay
for improved cold and hot water services and improved
solid waste disposal
• To help municipal authorities determine which service options
households prefer—and are willing to pay for
– We will focus on hot water supply
Steps in a contingent valuation
study
1. Define the good and the change in the good to be
valued
– Hot water service: 24/7, with satisfactory pressure and
temperature
Steps in a contingent valuation
study
1. Define the good and the change in the good to be
valued
– Hot water service: 24/7, with satisfactory pressure and
temperature
2. Define the geographical scope of the “market”
– Apartment blocks in Iasi
Steps in a contingent valuation
study
1. Define the good and the change in the good to be
valued
– Hot water service: 24/7, with satisfactory pressure and
temperature
2. Define the geographical scope of the “market”
– Apartment blocks in Iasi
3. Conduct focus groups on components of the
survey
– Met with small groups of municipal officials and
household heads, to learn about problems with service
provision and information needed to solve them
4. Pretest the survey instrument (questionnaire)
–
Based on focus group results, prepared draft
questionnaire and test-ran it on randomly selected
households
4. Pretest the survey instrument (questionnaire)
–
Based on focus group results, prepared draft
questionnaire and test-ran it on randomly selected
households
5. Administer the questionnaire to a random
sample of individuals within the defined market
–
1,218 households
4. Pretest the survey instrument (questionnaire)
–
Based on focus group results, prepared draft
questionnaire and test-ran it on randomly selected
households
5. Administer the questionnaire to a random
sample of individuals within the defined market
–
1,218 households
6. Test for the reliability and validity of results
–
Analyzed whether responses were consistent with
demand theory
Components of questionnaire
1.
2.
3.
4.
5.
6.
Collect information on respondent’s past, present, and
expected future use of the good
Present a hypothetical scenario describing the change in
the good to be valued
Present the hypothetical payment mechanism and related
stipulations
Elicit the respondent’s WTP (“bid elicitation procedure”)
Collect information on respondent’s socioeconomic
characteristics, available substitutes and complements for
good being valued
Debrief respondent (e.g., check budget constraint) and
enumerator
CVM: history
• First applied in the U.S. in the 1960s
• Came to prominence in early 1990s, due to use in
Exxon Valdez lawsuits
• Number of studies:
– 1995: 2000 studies in 40 countries
– 2001: 5000+ studies in 100+ countries
• Bilateral aid agencies and international
development banks are increasingly using CVM in
project appraisal and policy analysis
Principal advantages of CVM
1. In principle, willingness-to-pay (WTP)
and willingness-to-accept (WTA)
responses elicited by CVM equal
theoretically correct monetary measures of
utility changes
• Choice of WTP or WTA matters:
– Hammack & Brown (1974): WTA = 4  WTP
– Similar discrepancies in subsequent studies
– WTP is preference of (most) applied
economists:
• Respondents often struggle to come up with
bounded responses to WTA questions, perhaps
because more used to paying for goods (subject to a
budget constraint) than being paid for them
Principal advantages of CVM
2. CVM can be used to estimate non-use
(passive use) values, like existence values
Criticisms of CVM
1. Respondents fail to take CVM questions
seriously because they are non-binding
2. Respondents do not understand what they are
being asked to value
3. Respondents strategically manipulate the process
by distorting their true WTP
4. Respondents give answers that are inconsistent
with economic theory
–
Discrepancy in WTP/WTA was long thought to be
evidence of this
Potential biases in CVM studies
• Information bias: amount and type of information provided on
hypothetical good might affect stated WTP
– But this is true of any consumption decision
• Operational bias: respondents’ understanding of the good might differ
from researcher’s (e.g., a species might be interpreted as indicator for
ecosystem: “embedding effect”)
• Design bias
– Starting-point bias: respondents might interpret starting point in bidding
game as conveying information about value of the good
– Vehicle bias: choice of payment vehicle (e.g., entrance fee vs. higher taxes
to fund park) might affect stated WTP
• Hypothetical bias: respondents might ignore real-world costs and
benefits of consuming the good (e.g., budget constraint, crowding at
Grand Canyon)
• Strategic bias: e.g., individuals misstate actual WTP (“free-riding”)
Investigating the reliability and
validity of CVM results
• Design questionnaire to test for potential biases
(e.g., use different payment mechanisms)
• Analyze whether bids are well-behaved from an
economic standpoint (e.g., higher for individuals
with higher income): estimate “valuation
function”
• Replicate study
• Compare CVM results to estimates from other
valuation methods
– Ideally, compare bids to actual payments (e.g., fishing
licenses)
Current “consensus” on CVM
• In wake of use of CVM in Exxon Valdez oil spill,
NOAA convened a blue-ribbon panel, chaired by
two Nobel laureates, to assess the method
– Conclusion of the panel: “CV studies can produce
estimates reliable enough to be the starting point of a
judicial process of damage assessment, including lost
passive use values” (58 Federal Register 460, January
15, 1993)
Current “consensus” on CVM
• In wake of use of CVM in Exxon Valdez oil spill,
NOAA convened a blue-ribbon panel, chaired by
two Nobel laureates, to assess the method
– Conclusion of the panel: “CV studies can produce
estimates reliable enough to be the starting point of a
judicial process of damage assessment, including lost
passive use values” (58 Federal Register 460, January
15, 1993)
• But: many studies fail to comply with strict
guidelines recommended by the NOAA Panel
Choe, Whittington, Lauria (1996)
• CVM study in Davao, Philippines
• Objective: estimate the economic value that
residents place on improving water quality
in rivers and sea near their community, in
particular for recreational use
• Apply two nonmarket valuation techniques
– Stated-preference: CVM
– Revealed-preference: travel-cost method
Water quality in Davao
• Davao: second largest municipality in Philippines
(1990 population: 850,000)
– Most densely populated portion: on coast
• Since mid-1980s, most households have installed
flush or pour-flush toilets, voluntarily
– But: toilets empty into holding tanks, which seep into
ground or overflow into street drains and ditches
– < 1% of households are connected to sewer lines
• Consequence: Davao River and Davao Bay have
become highly polluted
– What had been most popular beach, Times Beach, has
gotten little use since 1992 public health warnings
Water improvement scenarios
• Scenario 1: Water Quality Improvement Plan
– Assume there is a city-wide plan to clean up rivers and
sea and make Times Beach safe for swimming and
other recreation
• Did not specify what plan would entail
– If adopted, each household will be required to pay a
monthly fee
– Sample: half of households that owned homes with
water-sealed toilets; all other households
• Scenario 2: Sewer Plus Treatment Plan
– Assume there is a city-wide plan to construct sewer
lines and treatment plants, which will not only clean up
rivers and sea and make Times Beach safe for
swimming and other recreation, but will also enhance
public health
– If adopted, each household will be required to pay a
monthly fee
– Sample: other half of households that owned homes
with water-sealed toilets
Types of values studied
Davao
Use values: make Times Beach safe for recreational
use, improved sanitation services
Developing countries
Use values: initially, mainly water supply,
sanitation, and recreation; more recently, air and
water quality, health, biodiversity (inc. passive use)
Developed countries
Mainly passive use values of natural areas
Choice of monetary measure of
welfare change
Davao
WTP for beach cleanup (Scenario 1)
WTP for improved sanitation service (Scenario 2)
Developing countries
Usually as above: WTP
Developed countries
Usually WTP (compensating surplus, if welfare
gain; equivalent surplus, if welfare loss)
Sometimes WTA (e.g., for loss of protected area)
• But
often get protest bids
Field procedures: Davao
1.
Conduct focus groups with small number of households, to learn
about existing situation and design initial version of questionnaire
2. Pre-test questionnaire with larger number of households
3. Finalize questionnaire and translate into Tagalog
4. Design sampling procedure (2-stage stratified random sample of
1200 households)
5. Train enumerators (role playing, practice interviews)
6. Conduct survey through face-to-face interviews
7. Confirm that enumerators completed interviews, and check
completed questionnaires
8. Conduct followup interviews if information missing or seemingly in
error
About half a year, from start to finish
Field procedures
Developing countries
Same as in Davao
Developed countries
Similar to Davao, but:
 Usually no need to translate questionnaire into
foreign language
 More information is typically available for
designing the sampling frame (in Davao, 32
percent of households could not be located)
 Surveys are usually conducted via telephone or
mail instead of face-to-face
Description of hypothetical good
Davao
Read description from prepared text
Show diagrams and pictures
Developing countries
Similar
Developed countries
Often more detailed description and more props:
goods often less familiar, payment mechanism often
less direct
Bid elicitation procedure
Davao
Two-step bidding game with random starting point
(25, 50, 100, 150, 200 pesos) and open-ended final
bid
Developing countries
Various:
 Sometimes as above
 Usually just open-ended question (worse)
 Sometimes referendum (“take-it-or-leave-it”)
approach (better): randomly allocate a set of
“prices” across respondents, each of whom
“votes” yes or no in view of the price he or she
was allocated
Developed countries
Referendum approach endorsed by NOAA panel
and strongly favored in U.S.
Information generated by bid
elicitation procedure: Davao
1.
Open-ended question: yields point estimate of
household’s WTP
–
–
WTP = WTPopen-ended
Analyze using OLS
Information generated by bid
elicitation procedure: Davao
1.
Open-ended question: yields point estimate of
household’s WTP
–
–
WTP = WTPopen-ended
Analyze using OLS
“Yes/No” questions: classify household’s WTP into three
categories
2.
–
–
Category 1:
WTP < L
Category 2:
L  WTP < H
Category 3:
H  WTP
Analyze using more sophisticated econometric methods (e.g.,
probit)
Testing the accuracy of WTP
bids: Davao
1.
Cooperativeness of respondents
–
2.
Plausibility of bids, cf. current income and expenditures
–
–
3.
4.
5.
Median bids = ~$1/month
Mean water bill = ~$5/month; mean income = ~$180/month
Explanatory power of model of determinants of WTP bids
Consistency of model results with economic theory
Neutrality of survey design
–
6.
Only 3% of households refused to be interviewed
Does starting value of iterative bidding affect final bids?
Split-sample “scope” test
–
Do households that own houses with water-sealed toilets bid more in
Scenario 2 than in Scenario 1?
Same approaches are used in other contingent valuation studies
Policy value of results
Davao
Determine which investments in improved
sanitation services, if any, are viable
• Conclusion: not much is viable at present
Developing countries
Similar to above, including for water supply
Set entrance fees for parks
Developed countries
Decide how to use public lands (e.g., harvest timber
or protect?)
Determine whether public should purchase private
lands to protect them
Determine compensation for environmental damage
(Exxon Valdez)
Whittington (1998)
• “Lessons learned” from CVM studies in
developing countries
• Main conclusion: although numerous issues
demand careful attention in CVM studies in
developing countries, in many respects
conducting high-quality CVM studies is
easier in developing countries than in
industrialized countries
Explaining “maximum WTP”
• Study in Haiti in late 1980s: “What do you
mean the maximum I would be willing to
pay? You mean when someone has a gun to
my head?”
– Is this what economists mean by WTP?
Explaining “maximum WTP”
• Study in Haiti in late 1980s: “What do you
mean the maximum I would be willing to
pay? You mean when someone has a gun to
my head?”
– Is this what economists mean by WTP?
• “I’m willing to pay, but not able”
– If this person willing to pay in an economic
sense?
Interpreting “yes/no” responses
• Interpretation of CVM questions can involve a
large cultural component
– Hence, must word questionnaires carefully
• During pretesting of questionnaire in Semarang,
Indonesia, all respondents said “yes” to
hypothetical connection fees and monthly tariffs
for improved water and sanitation services, no
matter how high
– When debriefed enumerators, discovered that
respondents actually said, “yes, but …”
Setting referendum prices
• Upper bound of referendum prices should nearly
be the “choke” price: intercept of demand curve
– But asking such a high price can make enumerators
look uninformed: “everyone knows most people can’t
afford such a high price”
Setting referendum prices
• Upper bound of referendum prices should nearly
be the “choke” price: intercept of demand curve
– But asking such a high price can make enumerators
look uninformed: “everyone knows most people can’t
afford such a high price”
• Lower bound should identify other end of demand
curve
– But respondents might know that service can’t be
provided so cheaply and thus doubt study’s credibility
– If agency funding the study is doing so to analyze
feasibility of prospective investment, it might not want
to give impression that it will charge a low price
• Very use of referendum method may spread
confusion about the problem being studied
– 1994 study in Mozambique: neighborhood
leader wanted to know why different
households were being asked to pay different
prices for improved water service
– Inferred that this might be actual policy, and it
didn’t seem fair
Advantages of conducting CVM
studies in developing countries
• Respondents are often quite receptive to listening
and considering questions posed
– As Mozambique example indicates, they make consider
the study to be all too real
– Malaysia study: respondents tried to pay enumerators
Advantages of conducting CVM
studies in developing countries
• Respondents are often quite receptive to listening
and considering questions posed
– As Mozambique example indicates, they make consider
the study to be all too real
– Malaysia study: respondents tried to pay enumerators
• Response rates are typically very high
– Helped by interviews being face to face
Advantages of conducting CVM
studies in developing countries
• Respondents are often quite receptive to listening
and considering questions posed
– As Mozambique example indicates, they make consider
the study to be all too real
– Malaysia study: respondents tried to pay enumerators
• Response rates are typically very high
– Helped by interviews being face to face
• Survey costs are an order of magnitude lower
– So, can have larger sample sizes, which permits more
split-sample testing of survey procedures