EAERE 2004 Meeting (Budapeste)

1. EAERE 2004 Meeting (Budapeste) Combining Stated Choice Methods and Hedonic Valuation: Measuring the Economic Benefits from Protecting the Business Activities from High Water in Venice Paulo A.L.D. Nunes University Ca’ Foscari of VeniceFondazione Eni Enrico MatteiJohns Hopkins University, Bologna Centre

2. Table of contents Economic valuation of the damages attributable to high water, with special focus on: • Economic activities located on the ground floor of the historical centre of Venice • Short term impacts (structural changes of the city in the long period are not considered), in particular: • structural damages • economic damages

3. High water in Venezia: some data (Comune di Venezia http://www.comune.venezia.it/maree)

4. Venezia: 4 Novembre 1966 (by Comune di Veneziahttp://www.comune.venezia.it/maree)

5. Venezia: 4 Novembre 1966 (Comune di Venezia: http://www.comune.venezia.it/maree)

6. High water in Venezia: intertemporal trend (Comune di Venezia: http://www.comune.venezia.it/maree)

7. Objectives Economic valuation of the damages due to high water in Venice, focusing on: • Economic activities located on the ground floor – important stakeholder in the Venetian institutional setting; • Short term impacts, valuation study is anchored on the present number and distribution of economic activities located in Venice, excluding any supplementary impact(s) that the high water can cause on a future mapping of the business activities.

8. Damages due to high water • On-site structural damages(fully market priced -- private insurance perspective) • damages attributable to the infiltration of water (structures and materials: maintenance and substitution of doors, maintenance and cleaning of pavements, and maintenance of walls) as well as costs supported by the business activities for mitigation (e.g. raising of the pavements, hydraulic pumps, bulkhead) • Off-site economic damages (not fully market priced -- public protection perspective) • damages attributable to the reduced overall functioning of the city dynamics during high water (logistic problems, supplying problems, difficulties in accessing the business, reduction of the customer flow) • Reflected on uncertainty wrt future revenues of the business activities, which has an impact (reduction) of the economic value of the business activities

9. Database • Census on all business activities that are located and operating on the city of Venice -- ground floor (COSES, total of 5097 observations) • For the study, respondents were selected on the basis of their complete answers with respect to: • The level of flooding • Structural damages • Total number of observations: 2598

10. Distribution of types of activity located at the ground floor

11. Level of flooding (COSES) 19.2% 48.3% 99.7%

13. High water protection measures: paratie

14. High water protection measures: vasca

15. High water protection measures: taglio delle mura

16. Goal • Monetary valuation of off-site economic damages due to high water on the productive activities located and working in Venice -- since it refers to damage component that are not fully captured by market prices. • Valuation strategy: development and application of a survey instrument that is anchored on the use of an economic valuation exercise -- portrayed in terms of a quasi-stated choice valuation method.

17. Consumer choice model 1) Each business activity is described by a set of characteristics (objectively measured) z = (z1, ..., zn) 2) Consumer preferences are described by an utility function U = (x, z1, ..., zn) 3) Consumer budget constraint y = x + b where b represents the individual’s valuation of an economic activity

18. Consumer choice model (cont.) We propose to estimate Equation (1) with the development of a survey that allows us to have direct information with respect to consumer choices regarding alternative characteristic packages – Equation (1) is therefore interpreted as a quasi-hedonic function. 4) To stress the essential spatial context with respect to the choice of the business activity, we define b according U (y – b, z11, z21, z31) = U (y, z10, z20, z30) where (z11, z21, z31) and (z10, z20, z30) denote two alternative characteristics’ packages Furthermore, since we admit that consumers’ preferences are depicted in the characteristics space dimension and disclosed in the market, we will be interested in estimating the implicit marginal valuation that the consumer places on the different characteristics under consideration – represented by βs in Equation (1). If we admit a linear, additive relationship between b and characteristics, we will estimate b = β0 + β1 * z1 + β2 * z2 + β3 * z3 + ε (1)

19. Instrument survey Preliminary considerations Sampling (about 1000 interviews) Face to face interviews Construction of the questionnaire Valuation questions Structure of the questionnaire Pre-test of the questionnaire Focus groups Final version of the questionnaire

20. Questionnaire: economic valuation exercise • Valuation of the damage due to the extreme high water event of the 16th Novembre, 2002 • Valuation of the damage due to a continued series of small high waterevents over a period of one week • Economic valuation exercise: quasi-stated choice questionnaire

21. Valuation exercise • Supponga un’attività economica (A) analoga alla Sua, situata nel centro storico di Venezia, il cui valore di mercato dipende dalle caratteristiche indicate nella scheda. • Confronti l’attività economica (A) con l’attività economica (B), sempre analoga alla Sua, ma con alcune caratteristiche diverse. • Vorremmo proporle ora un esercizio di valutazione economica: • Secondo lei, l’attività (B) vale di più, di meno o ha lo stesso valore dell’attività (A)? • Indichi in quale percentuale il valore dell’attività (B) è maggiore o minore rispetto al valore dell’attività (A).

22. Valuation exercise Objective: • Comparison between 2 alternative economic activities, defined by a number of attributes or characteristics Valuation mechanism: • 1) The respondent has to choose between activity A and activity B • 2) The respondent has to assign the value variation in percentage attributable to activity B with respect to activity A

23. Attributes and levels • Flooding level at which the water enters the locals without using protection devices: • 90 cm; 110 cm; 130 cm; 145 cm • Area of Venice that is attended by: • mainly tourists • mainly residents • tourists and residents • Possibility to reach the activity with the passerelle: • YES • NO • Value of the economic activity: • from 200.000 Euro to 2.000.000 Euro

24. Estimation results

25. Main effect model (only zi) Main effect model formulation (split sample – location)

26. Main effect model formulation (split sample – type of business activity)

27. Full cross effect model specification

28. Summary • Given the non-market nature of the indirect damages, we propose to work with a survey valuation approach, adapting state-of-the-art non-market valuation methods to the Venetian context. • We develop a valuation methodology that combines both the use of a stated choice questionnaire with hedonic pricing. • We proceed with the estimation of the quasi-hedonic valuation function, assessing the marginal impact of the different characteristics under consideration, including (1) the spatial position of the business activity with respect to the sea level; (2) whether the shop, and its neighborhood, is accessible by a catwalk; (3) and the type of neighborhood where the business activity is located.

29. Conclusions • Estimation results show that the marginal willingness to pay for having a business activity in a higher quota with respect to the sea level is ranges from 6 000 Euro to 9 000 Euro, which is robust to alternative empirical model specifications. • Such an estimate is smaller whenever the valuation exercise also includes the existence of catwalks, which can be interpreted as disclosing a potential substitution in the valuation across the two characteristics. • The marginal WTP for the catwalks reveals to be positive and its estimate magnitude stronger among the business activities that works with tourists.

30. Conclusions • Finally, the marginal valuation of business activities that are described in the survey as ‘working mainly with tourists’ is stronger among the business activities that currently already work with a great deal of tourists, including hotels and fashion/cloths shops. • This signals a clear trend for specialization in the areas of the city of Venice with the highest presence of tourists, such as San Marco and Rialto district areas, towards economic activities exclusively tailored for tourists, bringing along with it a loss in the social diversity in the historical center of Venice.

31. Contact: pnunes@unive.it Campo S. Maria Formosa 30122 Venezia - Italy tel +39 | 041 | 27 11 400 fax +39 | 041 | 27 11 461 web http://www.feem.it