Stated-preference methods

1. Stated-preference methods Outline • Contingent valuation method: overview and criticisms • Davao study • Lessons of experience with CVM in developing countries

2. Readings • Lesser et al., pp. 282-296 • Choe, Whittington, Lauria

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. Steps in a contingent valuation study • Define the good and the change in the good to be valued • Hot water service: 24/7, with satisfactory pressure and temperature

10. Steps in a contingent valuation study • Define the good and the change in the good to be valued • Hot water service: 24/7, with satisfactory pressure and temperature • Define the geographical scope of the “market” • Apartment blocks in Iasi

11. Steps in a contingent valuation study • Define the good and the change in the good to be valued • Hot water service: 24/7, with satisfactory pressure and temperature • Define the geographical scope of the “market” • Apartment blocks in Iasi • 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

12. Pretest the survey instrument (questionnaire) • Based on focus group results, prepared draft questionnaire and test-ran it on randomly selected households

13. Pretest the survey instrument (questionnaire) • Based on focus group results, prepared draft questionnaire and test-ran it on randomly selected households • Administer the questionnaire to a random sample of individuals within the defined market • 1,218 households

14. Pretest the survey instrument (questionnaire) • Based on focus group results, prepared draft questionnaire and test-ran it on randomly selected households • Administer the questionnaire to a random sample of individuals within the defined market • 1,218 households • Test for the reliability and validity of results • Analyzed whether responses were consistent with demand theory

15. Components of questionnaire • 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

16. 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

17. Principal advantages of CVM • In principle, willingness-to-pay (WTP) and willingness-to-accept (WTA) responses elicited by CVM equal theoretically correct monetary measures of utility changes

18. 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

19. Principal advantages of CVM • CVM can be used to estimate non-use (passive use) values, like existence values

20. Criticisms of CVM • Respondents fail to take CVM questions seriously because they are non-binding • Respondents do not understand what they are being asked to value • Respondents strategically manipulate the process by distorting their true WTP • Respondents give answers that are inconsistent with economic theory • Discrepancy in WTP/WTA was long thought to be evidence of this

21. 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”)

22. 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)

23. 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)

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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 Types of values studied

30. 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 Choice of monetary measure of welfare change

31. Field procedures: Davao • Conduct focus groups with small number of households, to learn about existing situation and design initial version of questionnaire • Pre-test questionnaire with larger number of households • Finalize questionnaire and translate into Tagalog • Design sampling procedure (2-stage stratified random sample of 1200 households) • Train enumerators (role playing, practice interviews) • Conduct survey through face-to-face interviews • Confirm that enumerators completed interviews, and check completed questionnaires • Conduct followup interviews if information missing or seemingly in error About half a year, from start to finish

32. 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 Field procedures

33. 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 Description of hypothetical good

34. 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. Bid elicitation procedure

35. Information generated by bid elicitation procedure: Davao • Open-ended question: yields point estimate of household’s WTP • WTP = WTPopen-ended • Analyze using OLS

36. Information generated by bid elicitation procedure: Davao • 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 • Category 1: WTP < L Category 2: L  WTP < H Category 3: H  WTP • Analyze using more sophisticated econometric methods (e.g., probit)

37. Testing the accuracy of WTP bids: Davao • Cooperativeness of respondents • Only 3% of households refused to be interviewed • Plausibility of bids, cf. current income and expenditures • 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 • 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

41. 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) Policy value of results

42. 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

43. 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?

44. 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?

45. 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 …”

47. 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”

48. 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

49. 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

50. 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