Can Contingent Valuation Measure Passive Use Values

EPA Grant Number: R824688
Title: Can Contingent Valuation Measure Passive Use Values
Investigators: Schulze, William , Brown, Gardner , Cameron, Trudy , Kahneman, Daniel , McClelland, Gary , Poe, Gregory
Current Investigators: Schulze, William , Brown, Gardner , Cameron, Trudy , McClelland, Gary , Poe, Gregory
Institution: Cornell University , Princeton University , University of California - Los Angeles , University of Colorado at Boulder , University of Washington
EPA Project Officer: Hahn, Intaek
Project Period: October 1, 1995 through September 30, 1997
Project Amount: $381,150
RFA: Valuation and Environmental Policy (1995) RFA Text |  Recipients Lists
Research Category: Economics and Decision Sciences

Description:

Contingent valuation (CV) is the only method currently available for practically measuring passive-use values. Because proposed laws may require that environmental regulations pass a benefit-cost test, CV has become central to the policy debate on environmental protection. Critics have raised substantial concerns about the ability of CV to produce reliable estimates of passive-use values. The most serious of these criticisms are: (1) hypothetical survey responses may not accurately predict actual behavior (validity), and (2) respondents may include alternative or additional sources of value when answering CV questions (embedding). A research team of economists and psychologists who span the range of viewpoints on CV has been formed to address this issue. Each researcher is, however, open to the possibility that CV may or may not be able to provide credible estimates of passive-use values. The group proposal structure will facilitate collaborative research. At the end of the project the group will attempt to provide a balanced assessment of the implications of the research.

To address the validity issue, the investigators propose to take advantage of a green pricing program offered by Niagara Mohawk Power Corporation. Niagara Mohawk plans to make annual offerings using an incentive compatible public good auction mechanism (a provision point with a money back guarantee) to provide specific green projects. This approach is unlike prior green pricing programs which have allowed free riding and have had poorly defined products. The first offering, if funded by customers, will provide an opportunity to purchase a landfill gas recovery project and plant 50,000 trees. Since Niagara Mohawk must offer the program to all customers, and since the air quality benefits of the landfill project will accrue locally, passive-use values may be present. This proposed research will utilize the second green offering, planned for the early summer of 1996. Five alternative CV elicitation methods, with two context variants, would be employed to attempt to estimate customer values prior to implementation of the second offering. These estimated values can then be compared with the actual customer values obtained in the public good auction. This opportunity to conduct a social experiment will help answer fundamental questions concerning the validity of CV, identify which methods, if any, are most appropriate, as well as allow for development of a calibration factor, etc. Niagara Mohawk has indicated its intention to support this proposal to NSF/EPA both by funding Cornell to evaluate the first offering, and by providing assistance in implementing the proposed NSF/EPA research.

To address the issue of embedding, a two part study is envisioned. An economic explanation for embedding has been developed which argues that, if environmental goods are close substitutes, one can explain embedding anomalies, i.e., if any two environmental goods are valued in order, and the first good always gets a much larger value than the second, no matter which good comes first, the result is plausible if all environmental goods are strong substitutes. As part of prior NSF and EPA sponsored research, the investigators have explored a multi-attribute choice (from among multiple options) approach which allows estimation of a random utility model of preferences for characteristics of environmental programs. This approach can identify substitutes in a choice environment (significant cross effects) if a sufficient sample size is employed (a Monte Carlo study of the required sample size has been completed). Thus, it is possible to test the proposed economic explanation for embedding . If the economic explanation fails, psychological explanations are the alternative. The next part of the proposed research will explore the psychology of embedding. The commodities to be used in this study are survival probabilities for endangered species, a topic of considerable importance in and of itself if reliable values can be obtained. Extensive pretesting will lead to a national survey using a split sample design with half of the respondents answering choice questions and half answering open ended willingness to pay questions (to allow exploration of order and other embedding effects).

Although the investigators hold differing opinions concerning the likely outcome of these experiments, the results of the proposed research will hopefully allow some consensus to be obtained. Those areas where disagreement remains will be clearly identified in the conclusions of the overall study.

Supplemental Keywords:

RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, decision-making, Ecology and Ecosystems, Social Science, Economics & Decision Making, contingent valuation, ecosystem valuation, social psychology, surveys, embedding, valuation, community involvement, collaborative resolution, Niagra Mohawk Power Company, decision analysis, valuing environmental quality, environmental assets, economic incentives, environmental values, preference formation, standards of value, cost benefit, multi-attribute utility, validity, environmental policy, environmental law, psychological attitudes, public values, Monte Carlo study, legal and policy choices, public policy, passive use values, multi-criteria decision analysis

Progress and Final Reports:

  • 1996
  • Final