Stated Preference & Experimental Markets

Methods for measuring non-market benefits

Today’s Menu

Constructed market approachesDesigning a CVM surveyConducting an experiment

Recall revealed preference

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

Answer: use “constructed market” methods

What are constructed market methods?

Stated preference methodsMore generally known as “Contingent Valuation Methods” (CVM)

• Ask people: “How much is the environmental good worth to you?”

Experimental marketsTypical goal: learn how people think about environmental goodsTwo types of experiments

• Field• Laboratory

Some examplesThe value of the Channel Islands marine reserve?

Do people value the organisms or the reserve?

Should DDT plume off of Rancho Palos Verde be cleaned up with state funds?How large are the wildlife damages from Exxon Valdez spill?The value of restoring steelhead to Ventura River?The environmental damage from drilling in ANWR?

How elicit “willingness to pay”?

No market exists within which to measure valueUse surveyMany challenges to do a credible job

Several built-in biases that must be overcome

Need to design survey to minimize opportunities for bias of results.

Value of solar-generated electricityIntroduction

Explain purpose of survey and how long it will take, importance of truthful answers

Background attitudesSolar as “green” electricityCompare to “brown” electricityImportance of air quality, current opinion about air qualityHave you participated in green markets?

Eliciting value of green electricityConcept of Renewable Energy Credit (REC)Would your purchase a REC for $X? (vary X)

Socioeconomic characteristicsGender, Age, Race, Income, Greenness

Example – Seoul CVM Survey Instrument

Introduction – explain purpose of survey and time to complete (30 min)

Request background attitudes and infoWhat is your opinion about current tap water in Seoul? (very good, good, etc)In the last five years have you or anyone in your household taken any of these steps to obtain cleaner water? (install water filter, etc)

Value of Water Quality ImprovementExplain major pollution accident in 1991 that contaminated drinking water of SeoulIf the government takes no action, how many times in the next five years do you think we will have a similar accident? [Give one minute description of continuous monitoring system that will warm your household of contamination]What is the most your household would pay in taxes for such monitoring?

Background informationAge, education, household size, income

Cookbook procedure [1 of 2]

1. Define the “market scenario” or payment vehicle

“How much are you willing to pay for …” vs.“Bond issue has been proposed to pay for …”

2. Determine elicitation methodDirect question, discrete choice, bidding game, payment card, etc…

3. Design elicitation scheme Mail, telephone, email, web, in person

Cookbook procedure [2 of 2]

4. Determine sample designPopulation, randomization of respondents, randomization of questions, etc.

5. Determine experimental designHow obtain demand curve and conduct further analysis to answer question

6. Estimate demand functionConduct analysis to answer question

Problems with CVMWTA or WTP?…get different answers.Hypothetical biasHow real is the budget constraint? Ambiguity about what is being valued“Warm Glow”—purchase of moral satisfaction?Open-ended is unfamiliar market contextEmbedding problem

Value of one park? Value of suite of parks?

Existence value is a problematic concept since it is unobserved

NOAA guidelines for CVM

Minimize non-responsePersonal interviewsPretest for interviewer effects etc.WTP not WTAReferendum formatProvide adequate background info.Remind of substitute commoditiesInclude & explain non-response option (not $0)

Types of payment vehicle

Payment affects all partiesNational tax, local tax, fee or charge for use, price increase for use. Note: respondent may disagree with agency responsible for managing resource.

Voluntary paymentDonation to trust fundNote: remember free-riding problem, also may get strategic bias.

Open-ended elicitation

“What is the maximum amount you would be prepared to pay every year [vehicle] to XXX?”For:

Straightforward, no implied value cues/anchoring bias, gives max WTP

Against:Large non-response/protest, unrealistically large bids, unreliable, unlike normal market transaction

Bidding game elicitation

“Would you pay $X every year via [vehicle—tax, utility bill]?” [keep increasing bid until answer is “No” or decrease until “Yes”]For:

Forces respondent to consider preferences.

Against: Anchor bias, yea-saying, cannot be used in mail surveys.

Payment card elicitation

“Which of the amounts listed below describes your maximum WTP every year [using vehicle Y] to improve X?” [list of $ values]

For:Avoids starting point bias, values can be actual tax or household benchmarks

Against: Range of numbers can induce bias, cannot be used on telephone.

Single-bounded dichotomous choice elicitation (referendum)

“Would you pay $X per year using [vehicle] to improve Y?” [randomly vary X]For

Simplifies choice (similar to market), minimizes non-response, straightforward

Against:May get inflated values, some yea-saying, less informative, starting point bias.

Double-bounded dichotomous choice elicitation

“Would you pay $X every year using [vehicle] to improve Y?” [If yes: “And would you pay Z (>X)?”, If no: “And would you pay W (<X)?”.For:

More efficient than referendum (because know bounds.

AgainstSame as referendum

Major sources of error in CVM

1. Scenario misspecification1. Divergence between what respondent is

answering and what researcher is asking

2. Implied value cues1. Unfamiliar choice problem, respondent wants

to give “right” answer.

3. Strategic bias1. Low bid (think taxes will increase but good

won’t)2. High bid (think won’t have to pay for it)

Reliability of CVM estimates

Compare results with comparable revealed preference results (e.g. solar)Construct market & compare resultsUse CVM to measure demand for market goodTest method (same sample over time)Surveys of purchase intentions and actual purchases (market research)

Example 1: Goose Hunting in Wisconsin

Goose licenses limited in number and issued by lotteryCompare three techniques

Travel CostCVMExperimental Methods

CVM WTP and WTA bracketed true value

Example 2: ecotourism in Kenya

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

Example 3: Economic value of noncommercial fish (US)

Rivers in Four Corners region2465 miles of river habitat for 9 endangered fish.Protection requires fish bypasses, passageways, habitat improvements.

What is the economic value of preserving the habitat?

The application (Four Corners fish)

Respondents givenMaps of critical habitatTold that officials thought habitat protection too costly, were going to eliminate critical habitat designationAsked if they would contribute to “Four Corners Endangered Fish Trust Fund”Also told all taxpayers would contribute

Voting for Four Corners fish

If majority votes in favor of contribution to fund:

Rivers managed for optimum fish protection. Fish will be saved & removed from ESA over next 20 years.

If majority votes againstRivers managed for maximum hydroelectic output. 4 of 9 would likely become extinct.

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

Dollar value randomly chosen from $1 - $350.

Results of Four Corners fish

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

Example 4: Value of Waterfalls

FERC faced relicensing. How much water should be required to fall at recreation area?

More water, less power generated.

Previous license required 50 cfs (trickle)Survey elicited WTP for increased overflow of water.

Survey & results: waterfalls

Pictures with different flow levels mailed to random sample of past visitors to site.How much pay to visit park in each case. How many times visit park?Result: Summer months optimal flow should be 500 cfs (not 50 cfs).

Experimental markets

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