Contingent valuation: A new perspective

After several decades of academic research on the contingent valuation (CV) method a consistent behavioral explanation of ‘hypothetical bias’ is still lacking. Based on evidence from economics, economic psychology and the political sciences, I propose an explanation that is based on two simple working hypotheses about respondent behavior in contingent valuation surveys. The first hypothesis is that survey respondents are unable to form consistent preferences about unfamiliar goods unless the choice context offers reliable, informative cues which can be rationally exploited in simplified heuristics. The second hypothesis is that the probability and impact of strategic responses in dichotomous-choice questions about public goods depends on the extent to which the presented hypothetical costs differ from the actual costs. The literature on hypothetical bias is revisited in the light of these behavioral hypotheses. I find that the hypotheses are generally supported by the empirical data. Moreover, the hypotheses are able to explain several important empirical phenomena that previous research has not been able to explain. In particular, they solve the puzzle that pre-election polls, but not CV surveys, are able to predict actual referendum outcomes, and they explain why income effects on willingness to pay are lower in CV responses than in actual votes. If confirmed by further studies, the hypotheses will have important implications for future research and practice. First, the hypothetical costs presented in the dichotomous-choice question should to be close enough to the actual costs to be credible to all respondents. This can be achieved by specifying the costs as a percentage (rather than absolute) change in taxes. Second, the respondents should be given the option to answer based on information about the positions of large parties and interest groups with known political orientation rather than based on the raw policy information. Theory and evidence suggest that this new survey paradigm largely eliminates the fundamental problems of the conventional stated preference methods.     

Can Hypothetical Questions Reveal True Values? A Laboratory Comparison of Dichotomous Choice and Open-Ended Contingent Values with Auction Values

Can hypothetical questions reveal true values? An examination of thelaboratory experimental literature examining contingent valuation (CV)lends some support for using open-ended hypothetical willingness to payquestions. However, experimental studies examining dichotomous choicehave found that hypothetical answers overstate demand. Consistent withthe experimental literature, published CV studies comparing open-ended todichotomous choice questions have shown that values from the dichotomouschoice method equal or exceed those of the open-ended method in everycase. This paper presents a series of experiments employing more than 800subjects to test this hypothesis for CV and compares the CV results toactual auction values in a single controlled experimental environment.     

Contribution of Contingent Valuation and Other Stated Preference Methods to Evaluation of Environmental Policy

Some form of stated preference method is essential for comprehensive evaluation of environmental policy options. The two most important stated preference methods are contingent valuation (CV) and choice modelling. I identify and discuss the major challenges facing CV and choice modelling researchers. Choice modelling applications to environmental valuation are comparatively recent, so the emphasis in this paper is on the more extensive body of CV research. The development of CV has been characterised by a (generally) constructive debate both within the economics profession, and between economists, philosophers, psychologists and other social scientists. As a result, much has been learnt about the nature of non-market economic values and how they might be measured. Important issues are the extent to which existing stated preference methods accurately represent individuals' values, and provide valid and reliable measures of changes in economic welfare. I review each of these issues in the light of recent theoretical and empirical work, identify the major outstanding problems, and indicate areas where progress is being made. I argue that the problems are solvable, and that eventually a theoretically sound and empirically effective method will be developed.     

Hypothetical Bias in Risk Preferences as a Driver of Hypothetical Bias in Willingness to Pay: Experimental Evidence

This study provides new insight on the established issue of elicitation bias in hypothetical choice settings. In particular, using an experiment that elicits real and hypothetical willingness to pay for the protection of otters, we provide evidence that the observed bias is driven by those who are both uncertain about their value and exhibit hypothetical bias in risk attitudes. This finding provides a reason why calibration approaches based on follow-up certainty questions have proven useful, but also suggests a degree of caution in applying the approach. Our results favour combining uncertainty calibration with CVM-X in which hypothetical bias in risk attitudes is also taken account to correct for hypothetical bias in WTP.     

Construct Validity of Dichotomous and Polychotomous Choice Contingent Valuation Questions

In this note we conduct construct validity tests for dichotomous choice (DC) and polychotomous choice (PC) contingent valuation questions. Contrary to previous results, we find that DC and PC estimates of willingness to pay are theoretically valid, convergent valid, and similar in terms of statistical precision. Similar to previous results, PC respondents are less sensitive to information than DC respondents. We conclude that DC and PC valuation questions are construct valid for this study. Sequential PC valuation questions could be used in studies where obtaining information about the certainty or intensity of respondent preferences would be useful.     

Induced-Value Tests of Contingent Valuation Elicitation Mechanisms

Using an induced-value experimental design that varies whether values for a “good” are certain or uncertain and whether payment is real or hypothetical, this study investigates issues of demand revelation, hypothetical bias, and value uncertainty for four elicitation mechanisms used in contingent valuation surveys: dichotomous choice, dichotomous choice with follow-up certainty question, payment card, and multiple-bounded discrete choice. For all elicitation mechanisms, we find no evidence of hypothetical bias: voting decisions do not vary systematically when payment is hypothetical versus when it is real. Under all design conditions we find the fewest deviations between stated and induced values and the strongest evidence of demand revelation with dichotomous choice. Stated uncertainty in dichotomous choice follow-up and multiple-bounded discrete choice questions does correlate with uncertain induced values, but the signal is noisy. We discuss the implications of our findings for the design of contingent valuation surveys.     

Eliciting Willingness to Pay without Bias using Follow-up Certainty Statements: Comparisons between Probably/Definitely and a 10-point Certainty Scale

Correction for hypothetical bias using follow up certainty questions often takes one of two forms: (1) two options, “definitely sure” and “probably sure”, or (2) a 10-point scale with 10 very certain. While both have been successful in eliminating hypothetical bias from estimates of WTP by calibrating based on the certainty of yes responses, little is known about the relationship between the two. The purpose of this paper is to compare the two using data from three field experiments in a private good, dichotomous choice format. We compare four types of yes responses that differ in the criterion used to determine if there is sufficient certainty for a hypothetical yes response to be considered a true yes response. We make several comparisons, but focus on determining which values on the 10-point scale give the same estimates of WTP as “definitely sure” hypothetical yeses and real yeses (actual purchases). Values that produce equivalence are near 10 on the certainty scale.     

The choice between multiplicative and additive production uncertainty

When modeling output uncertainty, the multiplicative specification is consistently chosen over the additive form, despite the latter being arguably intuitively more obvious. The rationale for this seems to be that when production risk is the only source of uncertainty, additive uncertainty does not reduce output below the certainty level, while multiplicative uncertainty does. We show that, in the absence of hedging, this result is drastically modified when there is simultaneous price and output uncertainty. In this situation the theoretical implications of the two specifications are sufficiently similar to preclude any a priori choice between the two. Thus the choice between the additive and multiplicative formulations may be dictated by how each performs in empirical analyses.     

Testing the Effectiveness of Certainty Scales,Cheap Talk,and Dissonance-Minimization in Reducing Hypothetical Bias in Contingent Valuation Studies

Stated preference methods such as contingent valuation and choice modeling are subject to various biases that may lead to differences between actual and hypothetical willingness to pay. Cheap talk, follow-up certainty scales, and dissonance minimization are three techniques for reducing this hypothetical bias. Cheap talk and certainty scales have received considerable attention in the literature, but dissonance minimization has not previously been experimentally tested. Using a four-way split sample design involving over 600 subjects, results from an actual referendum on provision of a quasi-public good were compared with three similar but contingent referenda employing the three bias-reducing techniques. Hypothetical bias was again present. Certainty scales, when properly calibrated, and dissonance minimization were found to be most effective in reducing the bias.     

Preferences for environmental quality under uncertainty

Although the expected effects of environmental policies and interventions are rarely known with certainty, stated preference surveys rarely elicit preferences over uncertain environmental outcomes. This article presents empirical results challenging the view that ignoring such uncertainty during preference elicitation is of no consequence so long as people only care about final environmental states. We show that measured preferences for final environmental states, water quality in this case, depend on whether people choose between final states or between lotteries over final states. In contrast to the typical finding for monetary lotteries, we find significant under-weighting of low probability events related to water quality.     

Willingness-to-pay for urban ecosystem services provision under objective and subjective uncertainty

There is growing concern that failure to acknowledge the risk and uncertainty surrounding ecosystem services (ES) delivery could have adverse effects on support for ES policy intervention in the long run. However, acknowledging risk may reduce support for policy interventions in the short term. In this paper, we sought to determine whether willingness-to-pay (WTP) for urban forest ES in Southampton, UK is affected by objective and subjective uncertainty surrounding ES delivery. We conducted a discrete choice experiment with a split sample design: one with a scenario specifying risky ES outcomes and one where zero risk was implied. Respondents’ subjective certainty surrounding the provision of ES was determined before and after the choice questions. Despite respondents’ risk aversion, introducing an objective likelihood attribute did not reduce WTP compared to the scenario with implied certain ES outcomes. Furthermore, whilst WTP for the overall scheme was found to be adversely affected by the presence of risk around ES outcomes, subjective uncertainty seemed to reduce WTP more than objective probabilities. Our results therefore support the idea that both objective probabilities and subjective uncertainty should be explicitly incorporated in the design of stated preference studies for ES valuation.     

Researching Preferences,Valuation and Hypothetical Bias

A number of recent papers in environmental economics have focused on the process of researching preferences – agents are uncertain about preferences but with effort may narrow their uncertainty. This issue has arisen in formulating bids in contingent valuation (CV) as well as the debate over the divergence between WTP and WTA. In the context of CV, it has been suggested that the hypothetical nature of the preference elicitation process biases responses. This paper provides both a theoretical model and experimental evidence to contribute to this debate. The model is a model of competitive bidding for a private good with two components that are particularly relevant to the debate. The first component is that bidders are unsure of their own value for the private good but may purchase information about their own value (researching preferences). The second component is that there is a probability that the auction is hypothetical – that the winning bidder will not get the private good and will not pay the winning bid. The experiment tests this theoretical model of bidding equilibrium and analyzes the effects of variations in the parameters (hypotheticalness, information costs and number of agents) on the endogenous variables (such as the proportion of bidders who become informed and the winning bid). Experimental results suggest that an increase in the hypotheticalness of an auction tends to decrease the likelihood that bidders pay for information on their valuation with an ambiguous effect on the winning bid.      

Choice Certainty and Consistency in Repeated Choice Experiments

The main objective of this study is to examine how repeated choice affects preference learning in stated preference experiments. We test different hypotheses related to preference learning by analyzing response patterns and asking respondents in a choice experiment to report their experienced certainty when going through the choice tasks. In a split-sample test, we show that follow-up choice certainty questions are procedural invariant. The self-reported certainty results indicate that learning occurs, but econometric testing procedures do not identify any significant impact of learning effects on parameter estimates or variance across choice tasks. Additional tests of choice consistency suggest that preferences in the choice experiment are stable and coherent.     

Choice Consistency and Preference Stability in Test-Retests of Discrete Choice Experiment and Open-Ended Willingness to Pay Elicitation Formats

This study tests the temporal stability of preferences, choices and willingness to pay (WTP) values using both discrete choice experiment (DCE) and open-ended (OE) WTP elicitation formats. The same sample is surveyed three times over the course of two years using each time the same choice sets. Choice consistency is positively correlated with choice certainty and choice complexity. The impact of choice complexity fades away in time, most likely as a result of learning and preference refinement. Although the OE WTP values remain stable over a time period of 2 years as in previous stated preference studies, DCE based WTP measures differ significantly, suggesting their use in benefits transfer may be limited.     

Contingent valuation and actual payment for voluntarily provided passive-use values: Assessing the effect of an induced truth-telling mechanism and elicitation formats

A fundamental question about the contingent valuation (CV) method is to what degree it predicts actual payments (AP). This has particularly been an intriguing matter related to voluntary provision of public goods representing primarily passive-use values. This paper reports the results from such a CV–AP comparison. Applying a voluntary payment mechanism there exists a theoretical expectation of upward bias in CV estimates and downward bias in AP. This study applied an induced truth-telling mechanism in one treatment group to assess the hypothetical bias effect in CV. The CV estimates in this treatment group were significantly lower than in the group that did not face this mechanism. But this effect was limited to those responding/acting to dichotomous choice, not affecting those responding to open-ended questions about willingness to pay.     

Giving Stated Preference Respondents “Time to Think”: Results From Four Countries

Previous studies have found that contingent valuation (CV) respondents who are given overnight to reflect on a CV scenario have 30–40% lower average willingness-to-pay (WTP) than respondents who are interviewed in a single session. This “time to think” (TTT) effect could explain much of the gap between real and hypothetical WTP observed in experimental studies. Yet giving time to think is still rare in binary or multinomial discrete choice studies. We review the literature on increasing survey respondents’ opportunities to reflect on their answers and synthesize results from parallel TTT studies on private vaccine demand in four countries. Across all four countries, we find robust and consistent evidence from both raw data and multivariate models for a TTT effect: giving respondents overnight to think reduced the probability that a respondent said he or she would buy the hypothetical vaccines. Average WTP fell approximately 40%. Respondents with time to think were also more certain of their answers, and a majority said they used the opportunity to consult with their spouse or family. We conclude with a discussion of why researchers might be hesitant to adopt the TTT methodology.     

Contingent valuation with heterogeneous reasons for uncertainty

We test the hypothesis that respondents stating divergent reasons for choice uncertainty differ in their probability to vote yes in a CV setting. We introduce the use of a follow-up question used to classify uncertain respondents according to reason for uncertainty. Results indicate that respondents whose uncertainty derived from concerns about unforeseen negative impacts associated with provision of the good were more likely to vote yes, and depending on the model, that the probability of a yes vote of these respondents was consistently different than that of respondents whose uncertainty derived from concern about cost of provision or expected benefits.     

Dealing with preference uncertainty in contingent willingness to pay for a nature protection program: A new approach

In this paper, we propose an alternative preference uncertainty measurement approach where respondents have the option to indicate their willingness to pay (WTP) for a nature protection program either as exact values or intervals from a payment card, depending on whether they are uncertain about their valuation. On the basis of their responses, we then estimate their degree of uncertainty. New within this study is that the respondent's degree of uncertainty is “revealed”, while it is “stated” in those using existing measurement methods. Three statistical models are used to explore the sources of respondent uncertainty. We also present a simple way of calculating the uncertainty adjusted mean WTP, and compare this to the one obtained from an interval regression. Our findings in terms of determinants of preference uncertainty are broadly consistent with a priori expectations. In addition, the uncertainty adjusted mean WTP is quite similar to the one derived from an interval regression. We conclude that our method is promising in accounting for preference uncertainty in WTP answers at little cost to interviewees in terms of time and cognitive effort, on the one hand, and without researcher assumptions regarding the interpretation of degrees of uncertainty reported by respondents, on the other.     

Least convex capacities

Summary. Debreu proposed the notion of `least concave utility' as a way to disentangle risk attitudes from the certainty preferences embedded in a von-Neumann Morgenstern index. This paper studies preferences under uncertainty, as opposed to risk, and examines a corresponding decomposition of preference. The analysis is carried out within the Choquet expected utility model of preference and is centered on the notion of a least convex capacity. Received: May 7, 1997; revised version: November 5, 1997