The Contingent Valuation Method

1. The Contingent Valuation Method • Stated preference technique • Questionnaire based • Direct method • Valuation of a hypothetical scenario • It is called “contingent valuation” because the valuation is contingent on the hypothetical scenario put to respondents • Non Use Values + Use Values • Willingness To Pay (WTP) question

2. Stated Preference Techniques: CVM An interview is used to create the hypothetical market within these questions are asked. The hypothetical market comprises two key parts: a statement of the proposed change; and an institutional mechanism through which the proposed change is to be provided/avoided and financed. The challenge in conducting a CV is to make the market as realistic as possible. The process of directly questioning a sample group to ascertain their valuation of a change can be divided into six stages. These are (each with a number of steps): definition of survey objectives; design of the questionnaire; surveying the sample population; creating a database and performing an exploratory data analysis; estimating WTP values; and reporting the survey results.

3. CVM: Stage 1 - Project Definition - Theoretical Model CV study should begin with a basic theoretical model: two purposes: Identifies the information required from questionnaire Generates predictions allowing results to be checked Number of sources of information that can be used to construct the model, including: predictions of economic theory and existing literature, discussion/meetings with focus groups/affected parties. Participants discuss understanding of the context of the good/service in question, the good/service itself, its “value”, who should provide it, how it should be paid for, whether they would contribute, etc. The information from the focus groups is particularly valuable in designing the CV survey.

4. CVM: Stage 1 - Project Definition - Sample Design For a site-specific resource, the sample may be drawn from: Visitors to the site (‘on-site’ sample) • does not elicit information on the WTP of ‘non-users’; • interviews must be kept short; • procedure is needed to select among visitors to a site Households within a certain radius of the site (‘off-site’ sample) • geographical boundaries need to be defined; • a larger sample required, many households may not visit the site It is also important to carefully select the size of the sample: A larger means more confidence that the sample mean WTP/WTA is a reliable estimate of the ‘true’ mean WTP/WTA. (Balance precision and cost)

5. CVM: Stage 2 - Questionnaire Design - Background Questions General background: Questions on general characteristics of the respondents – information for checking the validity of the valuation results Respondents’ tastes and socio-economic characteristics (is the sample representative?). Personal details - should , come at the end of the questionnaire Respondent’s knowledge of the commodity in question, e.g. background questions concerning the respondent’s visits to a recreation site should cover such issues as: • attitudes towards environmental issues; • proximity of their home to the site; • frequency of visits; • duration of trip; • reason for visit, etc. These questions should be asked at the beginning of the interview as they are relatively straightforward to answer, and will help to build-up the respondent’s confidence.

6. CVM: Stage 2 - Questionnaire Design - Preparation Questions To avoid bias, interviewer must make sure the respondent is aware of: budgetconstraints (you cannot spend more than you have!) their right to refuse to pay for the good If the event of a negative response, the reason must be recorded a ‘zero valuation’ is implied if: the respondent may not be able to pay anything; or the respondent may not be willing to pay anything. a ‘protest bid’ is implied if: the respondent may find it too difficult to establish a monetary valuation; the respondent may disapprove of the concept of expressing environmental resources in monetary terms; or may be hostile towards the institutional context.

7. Format of WTP question • Open Ended: • “How much are you willing to pay for public good A?” • Bidding Game: • 1) “Are you willing to pay X for public good A?” • 2a) If Yes to (1), “Are you willing to pay Y for public good A?” (Y>X) • 3a) If Yes (2a), “Are you willing to pay Z for public good A?” (Z>Y). • 4a) if Yes to (3a) … • If No to (Na), WTP questions stop. • 2b) If No to (1), “Are you willing to pay T for public good A?” (T<X) • … • Payment Cards: • choose a WTP point estimate from a list of values

8. Dichotomous or Discrete Choice CV (Referendum format): • “Are you willing to pay X for public good A?” => STOP • Dichotomous or Discrete Choice CV with follow-up: 1) “Are you willing to pay X for public good A?” 2a) If Yes to 1, “Are you willing to pay Y for public good A?” (Y>X) => STOP 2b) If No to 1, “Are you willing to pay Z for public good A?” (Z<X) => STOP

9. NOAA Panel Guidelines • Conservative design => better to underestimate WTP • WTP, rather than Willingness to Accept (WTA) • Referendum format (i.e. Yes/No Questions) • Accurate description of the good/scenario => use of focus groups and pretest of the survey instrument • Reminder of substitute commodities • Yes/No follow ups • Checks on understanding and acceptance • Cross tabulations • Sample size circa 500 is a minimum.

10. Other important aspects for questionnaire development (1) • Mail / In Person / On the Phone interview • In person => costly, interviewer bias, time consuming, more accurate, better option if it is difficult to explain the scenario (need pictures), only users if on site • Mail => low response rate, sampling bias => who takes the survey? Those who are interested in the topic?, limited information, relatively inexpensive • Telephone => relatively inexpensive, limited information, not accurate, response rate, developing countries? • Mail + Telephone • Internet • Computer based instruments

11. Other important aspects for questionnaire development (2) • Introduction • Warm-up questions • Questions on the knowledge of the problem / experience with the environmental good => USE values, etc • Description of the scenario • WTP question(s) • Debriefing questions => why did you vote in favour or against the program - Use and Non-Use values investigation => did you vote yes, because (a) you will visit the national park, (b) even if you will never visit the national park, you want future generations to visit the park, etc. • Attitudinal questions • Socio – demographic questions. Ask questions on Income at the end of the questionnaire!!! => we don’t want to irritate the respondent

12. CVM: Stage 2 - Questionnaire Design - Payment Vehicle Valuation question needs a realistic institutional context - usually an appropriate payment (or bid) vehicle (instrument). The payment vehicle is the mechanism through which the WTP/WTA values are to be raised/distributed. Key considerations when selecting a payment vehicle are: familiarity – does the respondent understand the payment vehicle? credibility – does the payment vehicle represent a realistic situation? empathy – is the respondent favourably or unfavourably disposed towards the recipient of the funds? feasibility – is the recipient of the funds capable of delivering the improvement? universality – would all the respondents be affected by the payment vehicle?

13. Dichotomous-Choice Contingent Valuation • When dichotomous choice questions are used, the researcher does not observe WTP directly: at best, he can infer that the respondent’s WTP amount is greater than the bid value (if the respondent is in favor of the program) or less than the bid amount (if the respondent votes against the plan), and form broad intervals around the respondent’s WTP. To estimate the usual welfare statistics, it is necessary to fit binary data models. • The simplest such models assume that an individual’s response to the WTP question is motivated by an underlying, and unobserved, WTP amount, which is normally (logistically) distributed. Formally, let WTP* be the unobserved WTP: WTPi=1 iffWTPi*>B and WTPi=0 iffWTPi*≤B • where B is the bid that was assigned to respondent i, WTP = 1 means that the response is a “yes,” and WTP = 0 means that the response to the payment question is a “no.”

15. median WTP is generally regarded as a robust, and conservative, welfare statistic associated with the good or proposed policy. If the distribution is not symmetric, it is estimated more precisely than mean WTP, and is interpreted as the value at which 50% of the respondents would vote in support of the program, and hence the cost at which the majority of the population would be in support of it.