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Redacted for Privacy AN ABSTRACT OF THE THESIS OF Mary Clare Ahearn for the degree of Doctor of Philosophy in Agricultural and Resource Economics presented on January 4, 1984. Title: An Analysis of Contingent Valuation Applied to Air Quality and Public Safety from Crime. Redacted for privacy Abstract approved: The past decade has seen a greater acceptance of contingent valuation as a technique for valuing changes in the level of a non- market good or service. Through this technique, willingness to pay or accept responses are collected on a survey instrument for hypo- thetical. changes in the level of a nonmarket good. The purpose of this research is to expand the empirical knowledge base of contingent valuation by investigating the relationships beten contingent valu- ation responses and objective indicators of the quality or quantity of the good, losses incurred from the current level of the good, related private market purchases and household characteristics. Contingent valuation responses are ex ante responses, or intended behavior, and are affected by underlying attitudes. Also of interest is the relationship between these attitudes, measured as satisfaction, and contingent valuation. Where contingent valuation is concerned with valuing a spcified change in povisionB, satisfaction is n general, unconstralued attitude about the adequacy of provision. The results Lndicatd r;hat the mean annual willingn to-ay fr improved aIr quality was $26.67. For improved safety from crino the mean bid was$41.23.The relationh1p between at fac:io &nd w:L.1- ingness to pay for improved air qaiity is judged to be açpopriateiy modeled as a recursive system. !owever, the empirical ru for public safety indicate that the hypothesized recursive :e1atL'uship does not exist. Th is likely due to the complexities the issue of crime tc the variability in the copo rite f satisfaction neasure. AppLi:etJon of tobit analysis to valuation responses is aio &xpiored. An Analysis of Contingent Valuation Applied to Air Quality and Public Safety from Crime by Mary Clare Ahearn A THESIS submitted to Oregon State University in partial fulfillment of the requirements for the degree of Doctor of philosophy Completed January 4, 1984 Commencement June 1984 APPROVED: Redacted for privacy Professor of Agricult a andesource Economics in charge of major Redacted for privacy Head of department of Agricultural and Resource Economics Redacted for privacy Dean of Gradua chool Date dissertation is presented January 4, 1984 Typed by Pauline Elizabeth Bethune for l4ary Clare Ahearn ACKNOWLEDGEMENTS I am appreciative of Joe Stevens' creativity and independent thinking which allowed this research to be conducted, improved its contents and enhanced the educational experience. I also want to acknowledge the economic insight shared and the support provided by Jack Edwards throughout my graduate program. Bob Mason provided substantial contributions, particularly through his leadership role in the development of the survey. I would also like to thank Russ Gum, Bob Jarvis and Ken Patterson for their service on my committee. In addition, I would like to acknowledge the support I received from the Economic Research Service and three individuals who were key to that support: Bernal Green, Jim Johnson and J.B. Penn. Many of my peers contributed to this research by acting as sounding boards for my ideas and providing helpful criticism on manyoccasions, especially Au Emami, Sharon Kelly, Rebecca Lent, Tanya Roberts and Jerry Whittaker. This dissertation is dedicated to Rita and Don Ward. "Potential choices... which seek to establish how much an individual would buy, were conditions something other than they are now.., has had little actual use in empirical economics, though one might say it is the chief content of the pure theory of demand." Kenneth J. Arrow TABLE OF CONTENTS INTRODUCTION 1 Problems Statement and Purposes 1 Organization of Dissertation 3 Background Information on the Problem 4 Public Goods: Air Quality and Public Safety 4 Air Quality 5 Public Safety 6 Techniques for Measuring the Value of Nonmarket Goods 7 THE THEORETICAL BASIS FOR CONTINGENT VALUATION AND REVIEW OF THE EARLIER APPLICATIONS 11 Theoretical Concepts 11 Applications of Contingent Valuation 18 Methodological Crosscheck 21 Survey-Induced Biases 25 Strategic Bias 26 Vehicle Bias 28 Starting Point Bias 29 Information Bias 29 Differences Between Compensating and Equivalent Measures 30 HOUSEHOLD RESPONSES TO PUBLIC GOOD PROVISION, THE ROLE OF CONTINGENT VALUATION AND THE CONCEPTUAL MODEL 35 Efficient Provision of a Public Good 35 Responses to a Nonoptimal Supply of a Public Good 36 Private Market Responses 41 Psychological Responses 45 Political Responses 48 The Role of Contingent Valuation 49 Crosscheck of Contingent Valuation Responses 50 Substitute-Based Crosscheck 50 Loss-Based Crosscheck 52 Conceptual Model of Contingent Valuation and Satisfaction 54 SURVEY AND SAMPLE DESCRIPTION 59 WTP and WTA Questions 59 Data Collection and Sampling 61 Survey Bias 63 RESULTS OF THE AIR QUALITY ANALYSIS 65 Crosscheck of Contingent Valuation 67 Estimation of Recursive Model 71 Satisfaction Estimates 73 Willingness-to-Pay Estimates 75 Summary of Least Squares Estimation 81 RESULTS OF THE HOUSEHOLD SAFETY ANALYSIS 83 Crosseheck of Contingent Valuation .... 87 Estimation of Recursive Model 91 Satisfaction Estimates 95 Willingness-to-Pay Estimates 97 Summary of Least Squares Estimation 103 THEAPPLICATIONOF TOBIT ANALYSIS TO CONTINGENTVALUATION 105 Description of Tobit Analysis 105 Results of the Application 107 SYNTHESIS AND IMPLICATIONS 1.11 Review of Purposes 111 Results 112 Summary of Satistaction Results 113 Summary of Willingness-to-Pay Results 114 Implications of the Recursive Model 115 Directions for Future Research 118 BIBLIOGRAPHY 120 APPENDIX A: Expenditure Function with a Quantity Restriction 127 APPENDIX B: Expression for the Contingent Valuation Response 128 APPENDIX C: WTP and WTA Survey Questions 130 APPENDIX D: Sampling Scheme, Sample Areas and Rates 138 Sampling Scheme 138 Sampling Areas and Rates 139 APPENDIX E: Definition of Variables 140 APPENDIX F: Test Statistic for Test Involving the Equality of. Sets of Coefficients 145 LIST OF FIGURES Figure Page Compensating and Equivalent Surpluses foran Increase in a Public Good 14 Exact Supply, Undersupply and Oversupply ofa Public Good 37 LIST OF TABLES Table Page Summary Statistics of WTP and WTA Bids for a Change in Air Quality, by State 66 Ordinary Least Squares Regression Results of Satisfac- tion with Air Quality, by State 74 Ordinary Least Squares Regression Results of Willingness to Pay for Improved Air Quality, by State 80 Summary Statistics of WTP and WTA Bids for a Change in Safety from Crime, by State 84 Ordinary Least Squares Regression Results of Satisfaction with Police Protection from Burglary and Theft, by State 96 Ordinary Least Squares Regression Results of Willingness to Pay for Improved Safety from Crime, by State 99 Results of Analysis of Covarlanceon Willingness-to-Pay for Police Protection, in Oregon 101 Tobit and OLS Results of WTP for Air Quality in Oregon 108 Tobit and OLS Results of WTP for Public Safety in Oregon 109 Li Mean Values of Variables Used in Safety from Crimeand Air Quality Models, by State 141 ANANALYSIS OF CONTINGENT VALUATION APPLIED TOAIR OIJALITY AND PUBLICSAFETYFROM CRIME INTRODTJCTI ON Problem Statement and Purposes An individual's preferences for local public goodsare expressed in several different fashions. The way in which these preferences are directly revealed in the market place is through migration to another community. This is equivalent to Tiebout's voting with one's feet concept of moving to another community in orderto consume a different and more satisfying "bundle" of local goods. Preferences for local amenities have been hypothesizedto be important factors in explaining the rural population turnaround of the 1970's andrecent research has more precisely identified that role (Beale; Stevens, 1980). Similarly, amenities of urban and suburban areas attract in- dividuals who hold those preferences. Of course, only extremely dis- satisfied residents would be willing to incur the high costs of moving and even then, these types of adjustments will be made infrequently.3-/ For the majority of residents, preferences for local public goodsare expressed indirectly in the market or in nonmarket settings. Identi- fication and understanding of underlying preferences have become major challenges for economists. Thegeneral purpose of this research is to extend the current knowledge of preferences for local public goods and consequent Tiebout's theory has been criticized on other grounds as well. For example, it assumes that interjurisdictional externalitiesare nonexistent (Stiglitz and Atkinson). 2 responses of individuals to the communally provided quantities. The inarginalist approach of neoclassical economics has much to contribute to an analysis of preferences for local, goods. One contribution from applied economics, contingent valuation, is the major focus of this research. Contingent valuation is a survey approach designed to elic- it dollar values for hypothetical changes in the level of a public good. Because of its newness, there are many important unanswered methodological questions regarding contingent valuation. Specific contributions of this research in addressing some of these questions include: a comparison of contingent valuation results to objective indicators of quality; a comparison of contingent valuation results to Individual
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