Contingent Valuation: a Practical Alternative When Prices Aren't

Journal of Economic Perspectives—Volume 26, Number 4—Fall 2012—Pages 27–42

Contingent Valuation: A Practical Alternative when Prices Aren’t Available

Richard T. Carson

ppersonerson maymay bbee wwillingilling ttoo mmakeake aann eeconomicconomic ttradeoffradeoff ttoo aassuressure tthathat a wwilder-ilder- nnessess aarearea oorr ssceniccenic resourceresource isis pprotectedrotected eveneven ifif nneithereither thatthat personperson nornor A ((perhaps)perhaps) anyoneanyone elseelse willwill actuallyactually visitvisit thisthis area.area. ThisThis ttradeoffradeoff isis ccommonlyommonly llabeledabeled “passive“passive useuse value,”value,” althoughalthough itit isis alsoalso knownknown byby otherother namesnames includingincluding ““existenceexistence value”value” aandnd ““stewardshipstewardship vvalue.”alue.” AAss KKrutillarutilla ((1967)1967) eexplainedxplained iinn hhisis cclassiclassic American Economic Review piece,piece, “Conservation“Conservation Reconsidered,”Reconsidered,” passivepassive useuse isis notnot ggenerallyenerally revealedrevealed byby choiceschoices inin thethe marketplace,marketplace, unlikeunlike manymany locallocal publicpublic goodsgoods wwhichhich aarere eeitherither ccapitalizedapitalized iintonto ppropertyroperty vvaluesalues oorr wwhichhich rrequireequire tthehe cconsumptiononsumption ooff complementarycomplementary privateprivate goodsgoods toto enjoy.enjoy. PassivePassive useuse representsrepresents thethe quintessen-quintessen- ttialial ppureure ppublicublic goodgood inin thatthat exclusionexclusion isis notnot possible,possible, nornor eveneven desirable,desirable, becausebecause eenjoymentnjoyment iiss nnonrivalrous.onrivalrous. TheThe cconceptoncept ooff ppassiveassive uusese hhasas pplayedlayed aann iincreasinglyncreasingly iimportantmportant rroleole iinn eeconomicconomic tthinkinghinking cconcerningoncerning tthehe vvaluealue ooff ppublicublic ggoods,oods, aandnd pparticularly,articularly, tthosehose involvinginvolving environmentalenvironmental andand naturalnatural resourceresource amenitiesamenities wherewhere ppassiveassive andand directdirect useuse valuesvalues areare oftenoften thoughtthought toto coexistcoexist (Freeman(Freeman 2003).2003). InIn CCarson,arson, Flores,Flores, andand MitchellMitchell (1999),(1999), mymy ccoauthorsoauthors andand I pproviderovide a ddetailedetailed ooverviewverview ooff ppassiveassive uusese vvalue.alue. WWithoutithout marketmarket information,information, otherother strategiesstrategies mustmust bebe consideredconsidered toto developdevelop mmeasureseasures ofof economiceconomic tradeoffstradeoffs thatthat involveinvolve passivepassive useuse value.value. ForFor example,example, passivepassive vvaluesalues cancan bebe capturedcaptured throughthrough a single-issuesingle-issue referendum,referendum, butbut popularpopular votesvotes onon bballotallot propositionspropositions thatthat relaterelate toto thesethese typestypes ofof concernsconcerns areare nonexistentnonexistent atat thethe nnationalational levellevel andand infrequentinfrequent atat thethe statestate oror locallocal level.level. However,However, moremore thanthan a half-half- ccenturyentury ago,ago, earlyearly studiesstudies ofof publicpublic goodsgoods likelike BowenBowen (1943)(1943) andand Ciriacy-WantrupCiriacy-Wantrup ((1947)1947) drewdrew thethe implicationimplication that,that, whenwhen thethe ballotballot boxbox isis notnot available,available, demanddemand

■ RRichardichard TT.. CCarsonarson iiss PProfessorrofessor ooff EEconomics,conomics, UUniversityniversity ooff CCalifornia,alifornia, SSanan DDiego,iego, LLaa JJolla,olla, CCalifornia.alifornia. HHisis eemailmail aaddressddress isis [email protected]@ucsd.edu. http://dx.doi.org/10.1257/jep.26.4.27. doi=10.1257/jep.26.4.27 28 Journal of Economic Perspectives

fforor publicpublic goodsgoods mightmight bebe estimatedestimated throughthrough anan appropriatelyappropriately structuredstructured surveysurvey ooff a representativerepresentative samplesample ofof thethe public—inpublic—in effect,effect, whatwhat wewe nownow callcall a contingentcontingent vvaluationaluation survey.survey. BowenBowen wentwent soso farfar asas toto argue:argue: “The“The pollingpolling ofof a “scientifi“scientifi cally”cally” sselectedelected samplesample mightmight produceproduce moremore accurateaccurate resultsresults thanthan generalgeneral voting,voting, unlessunless aarrangementsrrangements werewere mademade toto insureinsure thatthat everyevery personperson wouldwould actuallyactually vote.”vote.” CContingentontingent valuationvaluation studiesstudies aasksk questionsquestions tthathat helphelp toto revealreveal thethe monetarymonetary ttradeoffradeoff eeachach ppersonerson wwouldould mmakeake cconcerningoncerning tthehe vvaluealue ooff ggoodsoods oorr sservices.ervices. IInn CCarsonarson andand LouviereLouviere ((2011),2011), mmyy ccoauthoroauthor aandnd I pproviderovide a ccommonommon nnomenclatureomenclature fforor suchsuch “stated“stated preference”preference” questions.questions. SuchSuch surveyssurveys areare a practicalpractical alternativealternative aapproachpproach fforor eelicitingliciting tthehe vvaluealue ooff ppublicublic ggoods,oods, iincludingncluding tthosehose wwithith ppassiveassive uusese cconsiderations.onsiderations. ThousandsThousands ooff ccontingentontingent vvaluationaluation sstudiestudies hhaveave bbeeneen ddoneone iinn overover 130130 countriescountries llookingooking aatt ccultural,ultural, eenvironmental,nvironmental, hhealth,ealth, ttransportation,ransportation, aandnd otherother issuesissues ((CarsonCarson 22011).011). AAlmostlmost 6600 ppercentercent ooff tthehe eestimatesstimates iinn tthehe vveryery llargearge EEnvironmentalnvironmental VValuesalues RReferenceeference IInventorynventory ((EVRI)EVRI) ddatabaseatabase mmaintainedaintained bbyy EnvironmentEnvironment CanadaCanada inin conjunctionconjunction withwith thethe U.S.U.S. EnvironmentalEnvironmental ProtectionProtection AAgencygency andand thethe eenvironmentalnvironmental agenciesagencies ofof severalseveral otherother countriescountries comecome fromfrom ccontingentontingent vvaluationaluation ((atat hhttps://www.evri.ca).ttps://www.evri.ca). TThehe UU.S..S. EEnvironmentalnvironmental PProtec-rotec- ttionion Agency’sAgency’s (1994)(1994) eestimatesstimates ooff tthehe bbenefienefi tsts ofof thethe UU.S..S. CCleanlean WWaterater AAct—whichct—which llargelyargely comprisescomprises rrecreationecreation aandnd ppassiveassive uuse—isse—is dderivederived uusingsing ccontingentontingent vvalua-alua- ttion,ion, asas areare thethe bbenefienefi tsts ofof individualindividual rregulationsegulations ttargetedargeted aatt sspecifipecifi c industriesindustries oror wwaterater bodiesbodies (Griffi(Griffi thsths etet al.al. 2012).2012). ResultsResults fromfrom contingentcontingent valuationvaluation studiesstudies areare uusedsed forfor manymany purposespurposes iinn bbenefienefi t–costt–cost studies:studies: recentrecent examplesexamples iincludenclude tthehe wwill-ill- iingnessngness toto paypay ofof PennsylvaniaPennsylvania householdshouseholds forfor additionaladditional incarcerationincarceration versusversus a rrehabilitationehabilitation programprogram forfor seriousserious juvenilejuvenile offendersoffenders ((Nagin,Nagin, PPiquero,iquero, SScott,cott, aandnd SSteinbergteinberg 2006);2006); thethe willingnesswillingness ofof Lexington,Lexington, Kentucky,Kentucky, residentsresidents toto paypay higherhigher ttaxesaxes toto helphelp supportsupport thethe constructionconstruction ofof a newnew baseballbaseball stadiumstadium andand basketballbasketball aarenarena ( JJohnsonohnson aandnd WWhiteheadhitehead 22007);007); tthehe vvaluealue ooff ddevelopingeveloping vvaccineaccine ppoliciesolicies iinn AfricaAfrica ( Jeuland,Jeuland, Lucas,Lucas, Clemens,Clemens, andand WittingtonWittington 2009);2009); estimatingestimating thethe hourlyhourly vvaluealue ofof informalinformal ccareare ggiversivers iinn tthehe NNetherlandsetherlands ((dede MMeijer,eijer, BBrouwer,rouwer, KKoopman-oopman- sschap,chap, vvanan ddenen BBerg,erg, aandnd vvanan EExelxel 22010);010); llookingooking aatt wwillingnessillingness ttoo iincurncur hhigherigher wwaterater tariffstariffs fforor llessess rriveriver ppollutionollution iinn FFuzhou,uzhou, CChinahina ( JJiang,iang, JJin,in, aandnd LLinin 22011);011); aandnd tthehe wwillingnessillingness ooff tthehe UU.S..S. ppublicublic ttoo ppayay fforor cclimatelimate cchangehange mmeasureseasures ((Aldy,Aldy, KKotchen,otchen, aandnd LLeiserowitzeiserowitz 22012).012). TThishis essayessay bbeginsegins bbyy ddiscussingiscussing tthehe eeventsvents ssetet iinn mmotionotion bbyy tthehe Exxon Valdez oiloil sspillpill ofof MarchMarch 1989,1989, focusingfocusing onon whywhy itit isis importantimportant toto measuremeasure monetarymonetary tradeoffstradeoffs fforor goodsgoods wherewhere passivepassive useuse considerationsconsiderations loomloom large.large. AlthoughAlthough discussionsdiscussions oftenoften sseemeem toto putput muchmuch ofof theirtheir emphasisemphasis onon whetherwhether contingentcontingent valuationvaluation isis suffisuffi cientlyciently rreliableeliable forfor useuse inin assessingassessing naturalnatural resourceresource damagesdamages inin lawsuits,lawsuits, itit isis importantimportant ttoo rememberremember thatthat mostmost estimatesestimates fromfrom contingentcontingent valuationvaluation studiesstudies areare usedused iinn benefibenefi t–t– costcost assessments,assessments, notnot naturalnatural resourceresource damagedamage assessments.assessments. ThoseThose wworkingorking onon benefibenefi t–t– costcost analysisanalysis havehave longlong recognizedrecognized thatthat goodsgoods andand impactsimpacts thatthat ccannotannot bebe quantifiquantifi eded areare valued,valued, implicitly,implicitly, byby givinggiving themthem a limitlesslimitless valuevalue whenwhen ggovernmentovernment regulationsregulations precludepreclude certaincertain activities,activities, oror givinggiving themthem a valuevalue ofof zerozero bbyy leavingleaving certaincertain consequencesconsequences outout ofof thethe analysis.analysis. ContingentContingent valuationvaluation offersoffers a ppracticalractical alternativealternative forfor reducingreducing thethe useuse ofof eithereither ofof thesethese extremeextreme choices.choices. I putput Richard T. Carson 29

fforwardorward aann aaffiffi rmativermative ccasease fforor ccontingentontingent vvaluationaluation aandnd aaddressddress a nnumberumber ooff tthehe cconcernsoncerns tthathat hhaveave aarisen.risen.

Events Set in Motion for Contingent Valuation by the Exxon Valdez Spill

SSoonoon aafterfter tthehe Exxon Valdez spillspill inin MarchMarch 1989,1989, thethe statestate ofof AlaskaAlaska fundedfunded a contingentcontingent valuationvaluation study,study, containedcontained inin Carson,Carson, Mitchell,Mitchell, Hanemann,Hanemann, Kopp,Kopp, PPresser,resser, andand RuudRuud (1992),(1992), whichwhich estimatedestimated thethe AmericanAmerican public’spublic’s willingnesswillingness toto ppayay ttoo aavoidvoid aann ooilil sspillpill ssimilarimilar ttoo tthehe Exxon Valdez aatt aaboutbout $3$3 billion.billion. TheThe resultsresults ofof tthehe studystudy werewere sharedshared withwith ExxonExxon andand a ssettlementettlement forfor approximatelyapproximately $3$3 billionbillion waswas rreached,eached, thusthus avoidingavoiding a longlong courtcourt case.case.1 OOurur CCarsonarson etet al.al. (1992)(1992) $3$3 billionbillion esti-esti- mmateate bbasedased onon passivepassive useuse dwarfeddwarfed tthehe HHausman,ausman, Leonard,Leonard, andand McFaddenMcFadden (1995)(1995) $$44 mmillionillion ddollarollar eestimatestimate ooff tthehe ddirectirect eeconomicconomic llossesosses ffromrom llostost rrecreationecreation ddaysays iinn PPrincerince WWilliamilliam SSound,ound, iillustratingllustrating tthehe iimportancemportance ooff ccompensatingompensating tthehe ppublicublic fforor llostost ppassiveassive uuse.se. IInn tthehe aaftermathftermath ooff tthehe Exxon Valdez ooilil sspill,pill, tthehe UU.S..S. CCoastoast GGuarduard pputut iintonto pplacelace a vversionersion ofof thethe comprehensivecomprehensive planplan forfor preventingpreventing oiloil spillsspills putput forwardforward inin tthehe CarsonCarson etet al.al. (1992)(1992) study.study. ItIt waswas basedbased toto a largelarge degreedegree onon thethe originaloriginal riskrisk aassessmentssessment fforor sshippinghipping ooilil ooutut ooff AAlaskalaska tthathat hhadad ppredictedredicted oneone majormajor spillspill eeveryvery ttenen yyearsears ffromrom aann aaccidentccident eeerilyerily ssimilarimilar ttoo tthathat ooff tthehe Exxon Valdez iinn tthehe absenceabsence ofof rrisk-reducingisk-reducing measuresmeasures ((MooreMoore 11994;994; CCarson,arson, MMitchell,itchell, HHanemann,anemann, KKopp,opp, PPresser,resser, aandnd RRuuduud 22003).003). IInn tthehe yyearsears ppriorrior ttoo tthehe aaccident,ccident, ssomeome ooff tthehe mmainain ssafetyafety rrequire-equire- mmentsents hhadad bbeeneen aabandonedbandoned bbecauseecause theythey sseemedeemed ““expensive”expensive” andand unnecessary.unnecessary. OOnene ooff tthesehese wwasas tthathat ttankersankers hhaveave ““escortescort tugs.”tugs.” SoonSoon afterafter keykey elementselements ofof thethe pplanlan iinn ourour CarsonCarson etet al.al. (1992)(1992) studystudy werewere putput intointo place,place, anotheranother supertankersupertanker llostost powerpower inin thethe StraitsStraits ofof ValdezValdez andand drifteddrifted towardtoward a reefreef nearnear thethe oneone hithit byby thethe Exxon Valdez. OneOne ofof thethe plan’splan’s newnew escortescort tugstugs pushedpushed thethe supertankersupertanker awayaway fromfrom tthehe rreefeef wwhilehile thethe otherother tugtug shotshot itit a towline.towline. SinceSince then,then, escortescort tugstugs havehave hadhad toto ttakeake controlcontrol ofof a tankertanker inin PrincePrince WilliamWilliam SoundSound threethree otherother times,times, withwith thethe latestlatest bbeingeing EExxonMobil’sxxonMobil’s SeaRiver Kodiak iinn 22010.010. MMoreover,oreover, rrecognizingecognizing thethe potentiallypotentially largelarge passivepassive useuse costscosts fromfrom oil-relatedoil-related aactivitiesctivities ledled toto otherother changes.changes. TheThe U.S.U.S. OilOil PPollutionollution ActAct eenactednacted inin 19901990 rrequiredequired tthathat ttankersankers hheldeld bbyy sshellhell ccompaniesompanies wwithoutithout llargearge fi nancialnancial assetsassets carrycarry a $1$1 billionbillion ddollarollar insuranceinsurance policypolicy andand requiredrequired thosethose shippingshipping oiloil toto developdevelop comprehensivecomprehensive pplanslans ttoo rrespondespond ttoo ppotentialotential oiloil spills.spills. TThesehese actionsactions signifisignifi cantlycantly reducedreduced thethe

1 By law, the government trustees must spend any money received for harm to its resources on restoration or acquisition of like resources. Exxon spent approximately $2 billion on response and restoration and $1 billion on natural resource damages, which the government used acquiring like resources. If the case had gone to trial, major contested issues would have included whether Admiralty law limited Exxon’s liability; how much of Exxon’s expenditures on response and restoration were on response, which did not count toward Exxon’s liability, and on restoration, which did; and whether contingent valuation could be used to establish the loss to the public from the spill. Note that losses to commercial fi shing are the subject of private, not government, legal claims. 30 Journal of Economic Perspectives

ffrequencyrequency andand severityseverity ofof oiloil spillsspills fromfrom tankerstankers inin thethe UnitedUnited StatesStates relativerelative toto thethe rrestest ooff tthehe wworldorld ((ChappleChapple 2000).2000). InIn contrast,contrast, CongressCongress grantedgranted offshoreoffshore wellswells likelike tthehe BPBP Deepwater Horizon wellwell a liabilityliability limitlimit ofof $75$75 millionmillion dollars,dollars, althoughalthough unlim-unlim- iitedted lliabilityiability appliesapplies inin thethe casecase ofof grossgross nnegligence,egligence, willfulwillful misconduct,misconduct, oror violatingviolating a ffederalederal regulationregulation directlydirectly relatedrelated toto thethe spill.spill. (In(In thethe aftermathaftermath ofof thethe MarchMarch 20102010 ooilil sspill,pill, BBPP wwaivedaived tthehe ooffshoreffshore wwellell lliabilityiability ccap.)ap.) IInn thethe aftermathaftermath ofof thethe Exxon Valdez settlement,settlement, ExxonExxon putput onon a conferenceconference wwherehere researchresearch itit hadhad sponsoredsponsored inin preparationpreparation forfor thethe casecase waswas presentedpresented (see(see tthehe vvolumeolume eediteddited bbyy HHausman,ausman, 11993).993). IItsts ooverallverall cconclusiononclusion wwasas tthathat ccontingentontingent vvaluationaluation waswas uunreliable.nreliable. InIn rresponse,esponse, thethe UU.S..S. DDepartmentepartment ooff CCommerceommerce aassem-ssem- bbledled a blue-ribbonblue-ribbon panelpanel ofof expertsexperts chairedchaired byby KennethKenneth ArrowArrow andand RobertRobert SolowSolow ttoo eexaminexamine ccontingentontingent valuation.valuation. TheirTheir reportreport (Arrow,(Arrow, Solow,Solow, Portney,Portney, Leamer,Leamer, RRadner,adner, andand SchumanSchuman 1993),1993), knownknown asas thethe NOAANOAA PanelPanel Report,Report, waswas cautiouslycautiously ssupportive,upportive, fi ndingnding thatthat “well“well conductedconducted CVMCVM [contingent[contingent valuationvaluation method]method] sstudiestudies cancan produceproduce estimatesestimates reliablereliable enoughenough toto bebe thethe startingstarting pointpoint ofof a judicialjudicial pprocessrocess ofof damagedamage assessment,assessment, includingincluding lostlost passivepassive values.”values.” TheThe panelpanel alsoalso setset fforwardorward anan iinflnfl uentialuential setset ofof guidelinesguidelines forfor conductingconducting contingentcontingent valuationvaluation studies.studies. TThehe ttwowo cconflonfl ictingicting viewsviews encouragedencouraged a largelarge amountamount ofof theoretical,theoretical, econometric,econometric, eexperimental,xperimental, aandnd eempiricalmpirical rresearchesearch oonn ccontingentontingent vvaluation.aluation.

Economists, Survey Data, and Contingent Valuation

EEconomistsconomists areare naturallynaturally skepticalskeptical ofof datadata generatedgenerated fromfrom responsesresponses toto surveysurvey qquestions—anduestions—and theythey shouldshould be!be! ManyMany surveys,surveys, includingincluding contingentcontingent valuationvaluation ssurveys,urveys, areare inadequate.inadequate. WhittingtonWhittington (2002),(2002), oneone ofof thethe pioneerspioneers ofof contingentcontingent vvaluationaluation studiesstudies inin ddevelopingeveloping countries,countries, hashas lamentedlamented thethe ttendencyendency ttoo iimplementmplement qquickuick aandnd ccheapheap sstudiestudies tthathat aarere llikelyikely ttoo yyieldield fl awedawed results.results. HeHe notesnotes thatthat “we“we areare sstilltill a longlong wayway fromfrom tthehe pointpoint wherewhere itit isis ppossibleossible toto dodo high-qualityhigh-quality CVCV [contingent[contingent vvaluation]aluation] surveyssurveys withwith minimalminimal efforteffort oror expense.”expense.” ThisThis situationsituation isis nono differentdifferent ffromrom mmanyany ootherther aareasreas ooff eeconomicsconomics tthathat aarere hheavilyeavily ddependentependent oonn ssurvey-basedurvey-based ddataata — income,income, consumption,consumption, education,education, employment,employment, healthhealth status,status, andand soso on—on— butbut iitt isis sometimessometimes llessess oobviousbvious becausebecause economistseconomists areare oftenoften notnot activelyactively involvedinvolved inin hhowow ttheirheir ddataata iiss ccollectedollected andand oftenoften havehave nono formalformal ttrainingraining iinn ssurveyurvey rresearch.esearch. A ggoodood contingentcontingent valuationvaluation surveysurvey isis a veryvery differentdifferent processprocess thanthan thethe mentalmental iimagemage somesome readersreaders maymay havehave ofof a researcherresearcher walkingwalking upup toto peoplepeople inin a shoppingshopping mmallall aandnd askingasking howhow muchmuch theythey wouldwould paypay toto savesave a seasea otter.otter. ForFor anan exampleexample ofof a rreal-worldeal-world contingentcontingent valuationvaluation survey,survey, interestedinterested readersreaders mightmight startstart atat thethe bottombottom ooff mmyy wweb-pageeb-page aatt hhttp://www.econ.ucsd.edu/~rcarson,ttp://www.econ.ucsd.edu/~rcarson, wherewhere theythey cancan downloaddownload aandnd eexaminexamine tthehe ssurveyurvey iinstrumentnstrument fforor tthehe Exxon Valdez sstudy.tudy. IItt iiss 3399 ppagesages llong,ong, ppluslus 1144 ppagesages ooff mmapsaps aandnd pphotos,hotos, aandnd 1100 ppagesages ooff sshowhow ccardsards aandnd fi gures.gures. OOverall,verall, a wwell-designedell-designed ccontingentontingent vvaluationaluation ssurveyurvey mmustust cconveyonvey ttoo rrespondentsespondents tthathat tthehe ggovernmentovernment iiss cconsideringonsidering iimplementingmplementing a ppolicyolicy aandnd tthathat ttheirheir rresponsesesponses ttoo tthehe qquestionsuestions iinn tthehe ssurveyurvey wwillill bbee uusedsed ttoo hhelpelp iinformnform tthathat ddecision.ecision. TThehe ssurveyurvey ddescribesescribes tthehe pproblemroblem tthathat iiss tthehe ffocusocus ooff tthehe ssurveyurvey aandnd tthehe pplanlan tthathat tthehe ggovernmentovernment Contingent Valuation: A Practical Alternative when Prices Aren’t Available 31

iiss cconsideringonsidering ttoo aaddressddress tthathat pproblem.roblem. FForor ccomplexomplex ppolicies,olicies, aandnd pparticularly,articularly, tthosehose iissuesssues wwithoutithout a llotot ooff ppreviousrevious ssurveyurvey wworkork oonn ccloselylosely rrelatedelated ppolicies,olicies, tthehe pprocessrocess ooff ddevelopingeveloping a ssurveyurvey ccanan bbee llengthy:engthy: iitt ffrequentlyrequently iinvolvesnvolves ffocusocus ggroups,roups, ccognitiveognitive iinterviews,nterviews, ppretests,retests, aandnd ppilotilot sstudies.tudies. DDetailsetails mmatter:atter: tthehe ssurveyurvey sshouldhould bbee ddesignedesigned ssoo tthathat tthehe pplanlan iiss sseeneen aass aann eeffectiveffective rresponseesponse ttoo tthehe pproblem.roblem. TThishis mmustust bbee ddoneone iinn a wwayay tthathat rrespondentsespondents wwithoutithout a hhighigh sschoolchool ddegreeegree ccanan uunderstand.nderstand. TThehe ppresenta-resenta- ttionion ttypicallyypically iinvolvesnvolves ggraphicsraphics iintendedntended ttoo hhelpelp ppeopleeople uunderstandnderstand tthehe pproblemroblem aandnd tthehe ggovernment’sovernment’s pplan.lan. SSurveyurvey rrespondentsespondents nneedeed ttoo uunderstandnderstand tthathat iiff tthehe pplanlan iiss iimplemented,mplemented, iitt wwouldould bbee ppaidaid fforor uusingsing a ccoerciveoercive ppaymentayment mmechanism,echanism, ttypicallyypically ssomeome ttypeype ooff ttaxax oorr uutilitytility bbill;ill; eeachach rrespondentespondent mmustust bbee cconvincedonvinced tthathat a mmecha-echa- nnismism eexistsxists tthathat wwouldould eensurensure ttheyhey wwouldould ppayay iinn tthathat ccase.ase. BBecauseecause iitt iiss iimpossiblempossible ttoo ggetet aallll mmembersembers ooff tthehe ppublicublic ttoo aacceptccept aallll ddetailsetails ooff tthehe sscenario,cenario, iitt iiss sstandardtandard ppracticeractice ttoo aasksk a ssequenceequence ooff ““debriefidebriefi nng”g” qquestionsuestions ttoo hhelpelp ggaugeauge tthehe llikelyikely iimpactmpact ooff sscenariocenario rrejection.ejection. MMuchuch ofof thethe usefulnessusefulness ofof doingdoing a contingentcontingent valuationvaluation studystudy hashas toto dodo withwith ppushingushing sscientistscientists aandnd eengineersngineers toto ssummarizeummarize wwhathat tthehe pprojectroject wwouldould ddoo iinn ttermserms tthathat thethe publicpublic carescares about.about. Further,Further, thethe processprocess ofof developingdeveloping a contingentcontingent valua-valua- ttionion ssurveyurvey ooftenften eencouragesncourages eearlierarlier iinvolvementnvolvement bbyy ppolicymakersolicymakers iinn tthinkinghinking mmoreore ccriticallyritically aboutabout a project’sproject’s benefibenefi tsts andand costscosts andand inin consideringconsidering optionsoptions withwith lowerlower ccostsosts oorr ggreaterreater bbenefienefi tsts toto thethe public.public. AAss longlong asas respondentsrespondents believebelieve thatthat therethere isis a positivepositive probabilityprobability thatthat thethe ggovernmentovernment willwill taketake thethe rresultsesults ofof tthehe ccontingentontingent valuationvaluation surveysurvey intointo account,account, ttheyhey shouldshould useuse thethe opportunityopportunity toto inflinfl uenceuence thethe government’sgovernment’s decision.decision. InIn CarsonCarson aandnd GrovesGroves (2007),(2007), mymy coauthorcoauthor andand I demonstratedemonstrate thatthat thethe responseresponse toto a properlyproperly fformulatedormulated binarybinary discretediscrete choicechoice questionquestion representsrepresents “consequential”“consequential” economiceconomic bbehavior;ehavior; and,and, thatthat thethe incentiveincentive propertiesproperties ofof suchsuch surveysurvey questionsquestions withwith respectrespect ttoo eeconomicconomic bbehaviorehavior aarere iidenticaldentical ttoo tthosehose ooff a bbindinginding bballotallot pproposition.roposition.2 InIn thisthis ssense,ense, responsesresponses toto a goodgood contingentcontingent valuationvaluation studystudy cancan reasonablyreasonably bebe treatedtreated asas revealed economic behavior, akinakin ttoo tthathat oobtainedbtained iinn a vvoteote ooff a rrepresentativeepresentative ppopula-opula- ttionion oonn a bballotallot pproposition.roposition.

Neoclassical Economic Theory and Contingent Valuation Results

PPredictionsredictions fromfrom ssimpleimple vversionsersions ooff nneoclassicaleoclassical economiceconomic theorytheory cancan ssome-ome- ttimesimes ddifferiffer ffromrom ooutcomesutcomes ffoundound byby contingentcontingent valuationvaluation surveys.surveys. OfOf course,course, ppredictionsredictions fromfrom simplesimple versionsversions ofof neoclassicalneoclassical theorytheory cancan alsoalso differdiffer quitequite a bitbit ffromrom observedobserved real-worldreal-world behavior,behavior, asas thethe literatureliterature onon “behavioral“behavioral economics”economics” hashas ppointedointed outout (DellaVigna(DellaVigna 2009).2009). ContingentContingent valuationvaluation surveyssurveys areare designeddesigned soso thatthat

2 In Carson and Groves (2007), we show that the auxiliary conditions needed for truthful preference revelation to be a dominant strategy are that people can be compelled to comply with the payment provision of the scenario irrespective of the outcome and that the scenario offers a take-it-or-leave it choice that does not infl uence future offers. These conditions are the same for binding votes and advisory surveys. 32 Journal of Economic Perspectives

tthehe fi ndingsndings willwill reflrefl ectect actualactual behavior,behavior, soso itit shouldshould bebe nono surprisesurprise thatthat thethe samesame bbehavioralehavioral iinflnfl uencesuences onon whatwhat peoplepeople dodo inin marketsmarkets showshow upup inin surveys.surveys. Indeed,Indeed, ssomeome ooff tthehe bbest-knownest-known iinsightsnsights ooff bbehavioralehavioral eeconomicsconomics wwereere fi rstrst demonstrateddemonstrated inin ccontingentontingent vvaluationaluation ssurveys.urveys. IInn theirtheir overviewoverview paperpaper inin thisthis issue,issue, Kling,Kling, Phaneuf,Phaneuf, andand ZhaoZhao detaildetail thethe waysways rresearchersesearchers havehave addressedaddressed objectionsobjections thatthat thethe fi ndingsndings ofof contingentcontingent valuationvaluation ssurveysurveys appearappear incongruousincongruous withwith simplesimple versionsversions ofof neoclassicalneoclassical economiceconomic theory.theory. MMyy ssummaryummary hhereere ccanan bbee llimitedimited ttoo ssomeome kkeyey eexamples.xamples. InIn Carson,Carson, Flores,Flores, andand MMeadeeade ((2001)2001) aandnd CCarsonarson aandnd HHanemannanemann ((2005),2005), mmyy ccolleaguesolleagues aandnd I oofferffer a mmoreore ddetailedetailed ddiscussioniscussion ooff tthesehese iissues.ssues. OOnene ofof thethe mostmost persistentpersistent ofof thethe claimsclaims thatthat contingentcontingent valuationvaluation surveyssurveys areare uunreliablenreliable pointspoints toto a discrepancydiscrepancy betweenbetween willingnesswillingness toto paypay andand minimumminimum will-will- iingnessngness toto acceptaccept compensationcompensation forfor thethe samesame nonmarketnonmarket good.good. ThisThis fi ndingnding shouldshould aactuallyctually notnot bebe a surprise,surprise, eithereither inin termsterms ofof neoclassicalneoclassical economiceconomic theorytheory oror inin ttermserms ofof behavioralbehavioral economics.economics. TheThe predictedpredicted propertiesproperties ofof welfarewelfare measuresmeasures areare ooftenften quitequite differentdifferent forfor 1)1) casescases wherewhere everyoneeveryone willwill experienceexperience thethe samesame levellevel oror qquantityuantity ofof thethe publicpublic good,good, andand 2)2) casescases involvinginvolving priceprice changeschanges wherewhere consumersconsumers ccanan determinedetermine thethe amountamount ofof thethe goodgood theythey wishwish toto consume.consume. HanemannHanemann (1991)(1991) sshowshows willingnesswillingness toto paypay andand willingnesswillingness toto acceptaccept forfor a purepure publicpublic goodgood areare likelylikely ttoo bebe quitequite farfar apart,apart, whichwhich standsstands inin starkstark contrastcontrast toto Willig’sWillig’s (1976)(1976) well-knownwell-known rresultesult thatthat willingnesswillingness toto paypay andand willingnesswillingness toto acceptaccept forfor a price change sshouldhould ttypicallyypically bebe closeclose together.together. HicksHicks (1943)(1943) correctlycorrectly sawsaw thatthat welfarewelfare measurementsmeasurements iinvolvingnvolving rationedrationed goodsgoods (of(of whichwhich purepure publicpublic goodsgoods areare a specialspecial case),case), so-calledso-called ““surplus”surplus” measurements,measurements, areare fundamentallyfundamentally differentdifferent fromfrom thethe “variation”“variation” measuresmeasures wwhichhich typicallytypically involveinvolve priceprice changes.changes. TheThe underlyingunderlying reasonreason isis thatthat inin thethe price-price- cchangehange case,case, thethe magnitudemagnitude ofof thethe differencedifference betweenbetween thethe twotwo welfarewelfare measuresmeasures isis ggovernedoverned byby anan incomeincome elasticity,elasticity, thoughtthought toto bebe ofof reasonablereasonable magnitude;magnitude; mean-mean- wwhilehile forfor a quantityquantity (or(or quality)quality) change,change, thethe differencedifference isis governedgoverned byby thethe ratioratio ofof tthishis incomeincome parameterparameter toto a HicksianHicksian compositecomposite substitutionsubstitution parameterparameter betweenbetween tthehe goodgood andand marketedmarketed goods,goods, oftenoften thoughtthought toto bebe smallsmall inin magnitude.magnitude. Kling,Kling, PPhaneuf,haneuf, andand ZhaoZhao pointpoint outout thatthat enrichingenriching thethe basicbasic neoclassicalneoclassical frameworkframework byby aaddingdding dynamicdynamic considerationsconsiderations alsoalso tendstends toto drivedrive willingnesswillingness toto paypay andand willing-willing- nnessess toto acceptaccept measuresmeasures apart.apart. FromFrom a behavioralbehavioral economicseconomics view,view, thethe divergencedivergence bbetweenetween willingnesswillingness toto paypay andand willingnesswillingness toto acceptaccept isis a corecore predictionprediction ofof Kahn-Kahn- eemanman andand Tversky’sTversky’s (1979)(1979) prospectprospect theorytheory becausebecause whetherwhether a choicechoice isis framedframed inin ttermserms ofof gaingain oror lossloss inflinfl uencesuences behavior.behavior. Again,Again, thethe upshotupshot herehere isis thatthat willingnesswillingness ttoo paypay andand willingnesswillingness toto acceptaccept areare oftenoften notnot equal,equal, whetherwhether inin contingentcontingent valuevalue ssurveysurveys oror inin market-basedmarket-based tests;tests; indeed,indeed, HorowitzHorowitz andand McConnell’sMcConnell’s (2002)(2002) meta-meta- aanalysisnalysis showsshows thatthat thethe differencesdifferences areare similarsimilar inin bothboth settings.settings. TTwowo ootherther ssituationsituations wwherehere iitt iiss ooftenften aassertedsserted tthathat ccontingentontingent vvaluationaluation sstudiestudies pproduceroduce aanomalousnomalous rresultsesults iinvolvenvolve eestimatesstimates ooff iincomencome eelasticitieslasticities aandnd ssequenceequence eeffects.ffects. TThehe fi rrstst ccontendsontends tthathat iiff ccontingentontingent vvaluationaluation sstudiestudies wwereere vvalid,alid, tthenhen tthehe eestimatesstimates ooff tthehe iincomencome eelasticitylasticity ooff wwillingnessillingness ttoo ppayay fforor tthehe eenvironmentnvironment sshouldhould bbee ggreaterreater tthanhan oone,ne, bbecauseecause tthehe eenvironmentnvironment iiss a lluxuryuxury ggood.ood. TThehe mmainain ddiffiiffi cultyculty hhereere ((ignoringignoring tthehe pplausibilitylausibility ooff tthehe lluxury-gooduxury-good aassumptionssumption fforor tthesehese ggoodsoods aandnd Richard T. Carson 33

tthehe llikelihoodikelihood ooff mmeasurementeasurement eerrorrror iinn iincome)ncome) iiss thatthat thethe incomeincome elasticityelasticity ofof will-will- iingnessngness ttoo paypay isis a veryvery differentdifferent statisticstatistic thanthan thethe incomeincome elasticityelasticity ofof demand,demand, uponupon wwhichhich aann eeconomist’sconomist’s uusualsual ddefiefi nitionnition ofof a luxuryluxury goodgood isis based.based. InIn FloresFlores andand CarsonCarson ((1997),1997), mymy coauthorcoauthor andand I showshow thethe twotwo elasticitieselasticities areare functionallyfunctionally related,related, butbut uundernder mostmost plausibleplausible assumptions,assumptions, thethe incomeincome elasticityelasticity ofof willingnesswillingness toto paypay shouldshould bbee cconsiderablyonsiderably ssmallermaller tthanhan tthehe ccorrespondingorresponding iincomencome eelasticitylasticity ooff ddemand.emand.3 TThehe secondsecond assertionassertion isis thatthat largelarge differencesdifferences inin thethe measuredmeasured valuevalue ofof a goodgood ddependingepending uponupon thethe sequencesequence ofof otherother goodsgoods thatthat werewere alsoalso valuedvalued inin thethe samesame ssurveyurvey iindicatendicate thatthat contingentcontingent valuationvaluation isis unreliable.unreliable. However,However, thethe basicbasic theorytheory ooff iincomencome aandnd ssubstitutionubstitution effectseffects suggestssuggests thatthat sequencesequence effectseffects shouldshould occur.occur. InIn a willingness-to-paywillingness-to-pay sequencesequence ofof k goods,goods, keepingkeeping utilityutility constantconstant requiresrequires thatthat thethe aagentgent ggiveive uupp mmoneyoney aatt eeachach oorderrder iinn tthehe ssequenceequence aass a nnewew ggoodood iiss aacquired,cquired, wwhereashereas iinn a willingness-to-acceptwillingness-to-accept compensationcompensation sequence,sequence, keepingkeeping utilityutility constantconstant requiresrequires ggivingiving tthehe aagentgent mmoneyoney aass ggoodsoods aarere ssequentiallyequentially ttakenaken aaway.way. IInn CCarson,arson, FFlores,lores, aandnd HHanemannanemann ((1998),1998), mymy ccoauthorsoauthors andand I showshow thatthat thesethese sequence-relatedsequence-related differ-differ- eencesnces cancan easilyeasily bbee llarge:arge: specifispecifi cally,cally, willingness-to-paywillingness-to-pay andand willingness-to-acceptwillingness-to-accept ssequencesequences forfor iimposedmposed qquantityuantity cchangeshanges iinvolvenvolve a ppartiallyartially iinvertednverted ddemandemand ssystemystem iinn ttermserms ooff tthehe HHicksianicksian ssubstitutionubstitution tterms,erms, ssuchuch tthat,hat, iiff ssequenceequence oorderrder ddifferencesifferences aarere ssmallmall iinn ppricerice sspace,pace, ttheyhey wwillill ttypicallyypically bbee llargearge iinn ttermserms ooff ddifferencesifferences iinn wwelfareelfare mmeasures.easures. Thus,Thus, a goodgood valuedvalued fi rstrst inin a willingness-to-paywillingness-to-pay sequencesequence willwill tendtend toto bebe wworthorth moremore thanthan ifif itit isis vvaluedalued “lower”“lower” inin a sequencesequence ofof possiblepossible projects.projects.4 IInn a wway,ay, tthishis resultresult shouldshould bebe nono surprise:surprise: afterafter all,all, inin settingsetting a politicalpolitical agenda,agenda, controllingcontrolling tthehe oorderrder iinn wwhichhich pprojectsrojects aarere cconsideredonsidered isis thoughtthought toto bebe extremelyextremely iimportant.mportant. A fi nnalal ccriticismriticism ooff thethe contingentcontingent valuationvaluation methodmethod isis thatthat differentdifferent prefer-prefer- eencence eelicitationlicitation ttechniquesechniques ooftenften oobtainbtain ddifferentifferent eestimatesstimates ooff vvalue,alue, wwhichhich hhasas bbeeneen ttakenaken bbyy somesome criticscritics asas anan indicationindication thatthat surveysurvey respondentsrespondents dodo notnot havehave well-well- ddefiefi nneded preferencespreferences forfor nonmarketnonmarket goods.goods. ThisThis fi ndingnding hashas troubledtroubled contingentcontingent vvaluationaluation researchers,researchers, althoughalthough itit isis notnot uniqueunique toto contingentcontingent valuation.valuation. MarketingMarketing rresearchersesearchers andand eexperimentalxperimental economistseconomists fi ndnd thethe samesame phenomenon.phenomenon. Indeed,Indeed, ccognitiveognitive ppsychologistssychologists suchsuch aass TTversky,versky, SSlovak,lovak, aandnd KKahnemanahneman ((1990)1990) hhaveave aarguedrgued tthathat thethe ddivergenceivergence inin economiceconomic valuesvalues impliedimplied byby framingframing decisionsdecisions inin ttermserms ooff a choicechoice ratherrather thanthan matchingmatching responseresponse isis perhapsperhaps thethe fundamentalfundamental problemproblem wwithith economiceconomic theory.theory. A naturalnatural economiceconomic responseresponse toto thisthis issueissue isis toto studystudy howhow ddifferentifferent elicitationelicitation techniquestechniques shouldshould affectaffect thethe answersanswers given.given. UsingUsing neoclassicalneoclassical

3 Specifi cally, the income elasticity of willingness to pay is equal to the income elasticity of demand times a matrix of Hicksian substitution terms scaled by the ratio of ordinary income to the sum of ordinary income and the implicit income from all public goods. By defi nition, this ratio is less than one and likely to be substantially less than one. 4 There is some irony, though, that critics of the use of contingent valuation in natural resource damage assessments point to the substantial declines often seen in willingness to pay for a good as it is valued farther and farther out in a sequence as a reason not to use contingent valuation. Willingness to accept compensation is the theoretically correct welfare measure for harm from an oil spill (Arrow et al. 1993). Because willingness to accept is greater than willingness to pay for the same good valued fi rst in a sequence and because the value of a good in a willingness-to-accept sequence is increasing in terms of sequence order, so willingness to pay for a good appearing fi rst in a sequence is smaller than willingness to accept for the same good appearing in any sequence order. 34 Journal of Economic Perspectives

mmechanismechanism designdesign theory,theory, inin CarsonCarson andand GrovesGroves (2007),(2007), wewe demonstratedemonstrate thatthat ddifferentifferent eelicitationlicitation formatsformats hhaveave ddifferentifferent iincentivencentive aandnd iinformationnformation pproperties.roperties. RRationalational economiceconomic agentsagents shouldshould bebe responsiveresponsive toto thesethese propertiesproperties inin suchsuch a wayway tthathat ccommonlyommonly uusedsed ppreferencereference eelicitationlicitation fformatsormats sshouldhould pproduceroduce ddifferentifferent wwelfareelfare eestimates.stimates. ThisThis frameworkframework offersoffers a comprehensivecomprehensive setset ofof predictionspredictions concerningconcerning tthehe ccharacteristicsharacteristics ofof datadata collectedcollected usingusing differentdifferent preferencepreference elicitationelicitation methodsmethods aandnd ddifferencesifferences inin welfarewelfare estimatesestimates obtainedobtained usingusing tthem,hem, aandnd iitt hhasas ffundamentallyundamentally cchangedhanged hhowow rresearchersesearchers vviewiew sstatedtated ppreferencereference datadata (Poe(Poe andand VosslerVossler 2011).2011). IInn short,short, therethere areare oftenoften divergencesdivergences betweenbetween predictionspredictions ofof simplesimple neoclas-neoclas- ssicalical economiceconomic ttheoryheory aandnd aactualctual bbehavior,ehavior, aass wwellell aass bbetweenetween tthathat ssameame ttheoryheory aandnd rresponsesesponses ttoo ccontingentontingent vvaluationaluation ssurveys.urveys. IInn bbothoth ccases,ases, tthehe mmostost pproduc-roduc- ttiveive rresponseesponse iiss ooftenften ttoo iinvestigatenvestigate bbothoth tthehe ttheoryheory aandnd tthehe ddataata mmoreore ccarefully.arefully. UUsually,sually, a mmoreore rrealisticealistic ttheoreticalheoretical rrepresentationepresentation pprovidesrovides a rreasonableeasonable gguideuide ttoo oobservedbserved responses.responses. BButut ppeopleeople aarere nnotot pperfect;erfect; ttheirheir cchoiceshoices ccanan rreflefl ectect mistakes,mistakes, wwhichhich wwillill bbee apparentapparent iiff aann analystanalyst oobservesbserves tthemhem uundernder tthehe eequivalentquivalent ooff a mmicro-icro- sscope.cope. AAtt ssomeome ppoint,oint, a jjudgmentudgment hhasas ttoo bbee mmadeade aass ttoo wwhetherhether ttoo aacceptccept cconsumeronsumer ssovereigntyovereignty iinn tthehe fformorm ooff rrespectingespecting cchoiceshoices iinvolvingnvolving tthehe ttradeoffsradeoffs ppeopleeople ssayay ttheyhey aarere wwillingilling ttoo mmakeake wwhenhen ttheyhey aarere oobservedbserved iinn a ccontextontext ddesignedesigned ttoo ffacilitateacilitate ccarefulareful decisions.decisions.

Sensitivity to Scope

TThehe ArrowArrow etet al.al. (1993)(1993) NOAANOAA PanelPanel ReportReport putput forwardforward a setset ofof recommenda-recommenda- ttionsions thatthat largelylargely followedfollowed thethe proceduresprocedures usedused inin thethe CarsonCarson etet al.al. (1992)(1992) Exxon Valdez study,study, withwith oneone majormajor exception.exception. TheThe PanelPanel recommendedrecommended thatthat contingentcontingent vvaluationsaluations studiesstudies beingbeing donedone forfor litigationlitigation shouldshould passpass a “split“split scopescope test.”test.” ThisThis ttestest rrequiresequires askingasking twotwo separateseparate subsamplessubsamples ofof respondentsrespondents aboutabout twotwo differentdifferent ddescriptionsescriptions ofof a good,good, wherewhere thethe amountamount ofof thethe goodgood alongalong somesome qualityquality oror quan-quan- ttityity ddimensionimension sshouldhould mmakeake iitt cclearlylearly ““larger.”larger.” TThehe uunderlyingnderlying concernconcern here,here, voicedvoiced byby KahnemanKahneman andand KnetschKnetsch (1992)(1992) andand HHausmanausman (1993),(1993), waswas thatthat respondentsrespondents toto contingentcontingent valuationvaluation surveyssurveys maymay havehave a ccertainertain amountamount thatthat theythey areare willingwilling toto spendspend on,on, say,say, environmentalenvironmental protectionprotection iissuesssues generally,generally, andand soso theythey willwill tendtend toto respondrespond withwith thisthis amountamount inin mindmind regard-regard- llessess ofof thethe actualactual characteristicscharacteristics ofof thethe goodgood beingbeing valued.valued. AnAn often-citedoften-cited exampleexample iiss a contingentcontingent valuationvaluation studystudy inin whichwhich respondentsrespondents toto a self-administeredself-administered shop-shop- ppinging mmallall ssurveyurvey aappearedppeared wwillingilling toto ppayay tthehe ssameame aamountmount ttoo ssaveave 22,000,,000, 220,000,0,000, oorr 200,000200,000 birdsbirds fromfrom bbeingeing kkilledilled bbyy oiloil (Desvousges,(Desvousges, Johnson,Johnson, Dunford,Dunford, Boyle,Boyle, HHudson,udson, andand WilsonWilson 1993).1993). However,However, inin thisthis studystudy respondentsrespondents werewere alsoalso toldtold thatthat tthehe populationpopulation ofof birdsbirds waswas veryvery large,large, withwith thethe percentpercent ofof birdsbirds beingbeing killedkilled inin thethe tthreehree ssplit-sampleplit-sample ttreatmentsreatments bbeingeing ssimilar:imilar: ((a)a) ““muchmuch llessess tthanhan 11%% ooff tthehe ppopula-opula- ttion”,ion”, (b)(b) “less“less thanthan 1%1% ooff tthehe population”,population”, andand (c)(c) “about“about 2%2% ofof thethe population.population. IInn sshort,hort, thethe seemingseeming insensitivityinsensitivity toto scopescope shownshown byby thethe respondentsrespondents inin thisthis studystudy iiss eexactlyxactly whatwhat isis likelylikely toto havehave beenbeen shownshown byby manymany professionalprofessional ecologistsecologists givengiven tthishis iinformation.nformation. HanemannHanemann (2008)(2008) replicatesreplicates thisthis studystudy inin thethe samesame shoppingshopping Contingent Valuation: A Practical Alternative when Prices Aren’t Available 35

mmallall ccontextontext withwith twotwo subsamples,subsamples, oneone wherewhere 1 percentpercent ofof thethe birdbird populationpopulation isis iimpactedmpacted andand thethe otherother withwith 1010 percent.percent. HeHe fi ndsnds a sizeablesizeable statisticallystatistically signifisignifi cantcant ddifferenceifference iinn wwillingnessillingness toto paypay betweenbetween thesethese twotwo treatments.treatments. GGiveniven tthehe cconcernoncern ooverver tthehe sscopecope iissue,ssue, nnewew eexplicitxplicit sscopecope ttestsests qquicklyuickly aappeared,ppeared, aandnd sseveraleveral iinstancesnstances wwereere aalsolso iidentifidentifi eedd wwherehere ppastast sstudiestudies ddoneone fforor ppolicyolicy ppurposesurposes hhadad uusedsed ssplitplit ssamplesamples wwithith ggoodsoods ddifferingiffering iinn sscope.cope. IInn CCarsonarson ((1997),1997), I rreviewedeviewed tthishis lliteratureiterature aandnd ffoundound 3300 ssplitplit ssampleample ttestsests wwhichhich rrejectedejected tthehe sscopecope iinsensitivitynsensitivity hhypothesis.ypothesis. MMostost ooff tthesehese iinvolvednvolved ggoodsoods wwherehere ppassiveassive uusese wwasas tthoughthought ttoo bbee iimpor-mpor- ttant.ant. TTwowo llargearge sstate-of-the-arttate-of-the-art iin-personn-person ssurveysurveys ooff tthehe ggeneraleneral ppublic,ublic, oonene iinn tthehe UUnitednited SStatestates iinvolvingnvolving DDDTDT ddepositseposits ooffff tthehe ccoastoast ooff LLosos AAngelesngeles ((CarsonCarson eett aal.l. 11994)994) aandnd oonene iinn AAustraliaustralia iinvolvingnvolving ppreservationreservation ooff tthehe KKakaduakadu CConservationonservation ZZoneone ((Carson,Carson, WWilks,ilks, aandnd IImbermber 11994)994) iincludedncluded eexplicitlyxplicitly ddesignedesigned sscopecope ttestsests uusingsing ggoodsoods wwherehere ppassiveassive uusese cconsiderationsonsiderations wwereere tthoughthought ttoo bbee tthehe ppredominantredominant ssourceource ooff vvalue.alue. EEachach ooff tthesehese ssurveysurveys uusedsed iidenticaldentical ddescriptionsescriptions ooff tthehe llocalocal eecosystemscosystems iinvolved,nvolved, hhowow tthehe ggoodsoods wwouldould bbee pprovided,rovided, aandnd hhowow ttheyhey wwouldould bbee ppaidaid ffor,or, bbutut oonene ssubsampleubsample wwasas pprovidedrovided a ggoodood llargerarger iinn sscopecope tthanhan iinn tthehe ootherther ssubsample.ubsample. IInn bbothoth ccases,ases, tthehe sscopecope iinsensitivitynsensitivity hhypothesisypothesis iiss sstronglytrongly rrejectedejected ( p < .001).001) aandnd wwillingness-to-payillingness-to-pay eestimatesstimates fforor tthehe llargerarger ggoodood iinn bbothoth ccasesases aarere aalmostlmost ddoubleouble tthathat ooff tthehe ssmallermaller ggood.ood. TThehe aargumentrgument tthathat sscopecope iinsensitivitynsensitivity iiss a ggeneric,eneric, uunavoidablenavoidable ccharacteristicharacteristic ooff ccontingentontingent vvaluationaluation sstudiestudies hhasas bbeeneen sshownhown ttoo bbee ffalse.alse. OOff ccourse,ourse, pparticulararticular sstudiestudies mmayay sshowhow iinsensitivitynsensitivity ttoo sscope,cope, aandnd rresearchesearch hhasas iidentifidentifi eded ttwowo mmainain aareasreas wwherehere tthishis ttendsends ttoo ooccur.ccur. FFirst,irst, llow-probabilityow-probability rrisksisks aarere ooftenften ppoorlyoorly uunderstoodnderstood iinn ccontingentontingent vvaluationaluation ssurveys,urveys, aass ttheyhey aarere bbyy cconsumersonsumers iinn rreal-worldeal-world bbehaviorehavior iinvolvingnvolving fi nancialnancial pplanninglanning aandnd iinsurancensurance ddecisions.ecisions. VVariousarious ggraphicalraphical rrepresentationsepresentations hhaveave bbeeneen sshownhown ttoo iimprovemprove uunderstandingnderstanding iinn ccontingentontingent vvaluationaluation ssurveysurveys ((forfor eexample,xample, CCorso,orso, HHammitt,ammitt, aandnd GGrahamraham 22001),001), aandnd rresearchersesearchers aarere nnowow llookingooking aatt ssimilarimilar wwaysays ttoo aassistssist cconsumersonsumers iinn mmakingaking bbetteretter fi nnancialancial pplan-lan- nninging ddecisions.ecisions. SSecond,econd, wwherehere a pprogramrogram iiss sseeneen ttoo pproviderovide mmultipleultiple ooutputs,utputs, ssuchuch aass pprotectingrotecting ddifferentifferent eendangeredndangered sspecies,pecies, iitt ccanan bbee ddiffiiffi ccultult ttoo ggetet ddistinctistinct wwillingness-illingness- tto-payo-pay eestimatesstimates fforor tthehe iindividualndividual ooutputsutputs aass oopposedpposed ttoo tthehe eentirentire pprogram.rogram. WWhilehile wwell-ell- ddesignedesigned ccontingentontingent vvaluationaluation sstudiestudies wwillill ttypicallyypically ppassass a sscopecope ttest,est, ssuchuch ttestsests hhaveave sseveraleveral cconceptualonceptual pproblemsroblems tthathat llimitimit ttheirheir ppotentialotential uusefulness.sefulness. FFirst,irst, wwhilehile ccontingentontingent vvaluationaluation ccriticsritics ssometimesometimes ccontendontend tthathat wwillingnessillingness ttoo ppayay sshouldhould bbee ((almost)almost) llinearlyinearly iincreasingncreasing aalonglong ssomeome qquantityuantity ddimension,imension, ddecliningeclining mmarginalarginal uutilitytility iiss mmoreore llikely,ikely, wwhichhich ccanan iinflnfl uuenceence tthehe sstatisticaltatistical ppowerower ooff sscopecope ttestsests ((RollinsRollins aandnd LLykeyke 11998).998). SSecond,econd, fforor a ssubstantialubstantial ffractionraction ooff tthehe ppublic,ublic, tthehe llikeli-ikeli- hhoodood ooff tthehe ggovernmentovernment ddeliveringelivering oonn vveryery llargearge pprojectsrojects ccanan bbee pperceivederceived ttoo bbee mmuchuch llowerower tthanhan tthathat fforor ssmallermaller pprojects,rojects, iinn wwhichhich ccasease vvaluesalues pplacedlaced oonn ttwowo ggoodsoods mmayay bbee eentangledntangled wwithith bbeliefseliefs aaboutbout hhowow wwellell ggovernmentovernment ffunctions.unctions. FFinally,inally, ttruerue wwillingnessillingness ttoo ppayay mmayay nnotot eevenven bbee mmonotoniconotonic iinn ssomeome iinstances.nstances. OOnene ccanan iimaginemagine a ccase,ase, fforor eexample,xample, iinn wwhichhich a mmodestodest iincreasencrease iinn tthehe wwolfolf ppopulationopulation mmayay bbee sseeneen aass a ggoodood tthing,hing, wwhilehile a ssubstantiallyubstantially llargerarger iincreasencrease iiss vviewediewed nnegativelyegatively ((Heberlein,Heberlein, WWilson,ilson, BBishop,ishop, aandnd SSchaefferchaeffer 22005).005). TThehe ttimeime mmayay hhaveave ccomeome ttoo llistenisten wwithith aann oopenpen mmindind ttoo tthehe mmessageessage tthathat ssurveyurvey rrespondentsespondents aarere sseekingeeking ttoo cconveyonvey wwhenhen ttheirheir aanswersnswers ssuggestuggest tthathat cchangeshanges iinn tthehe sscopecope ooff tthehe ggoodood ddoo nnotot mmatteratter ttoo tthem.hem. 36 Journal of Economic Perspectives

CContingentontingent vvaluationaluation ccriticsritics ssometimesometimes aalsolso aarguergue tthathat tthehe vvaluesalues ooff ssurveyurvey rrespon-espon- ddentsents mmustust ssatisfyatisfy a mmoreore sstringenttringent ssequentialequential aadding-updding-up ttestest wwherebyhereby a ccompositeomposite ggoodood iiss bbrokenroken iintonto ttwowo ppartsarts aandnd aallll tthreehree vvaluedalued sseparately.eparately. SSuchuch a ttestest iiss llogicallyogically ccorrectorrect ggiveniven iitsts aassumptions.ssumptions. BButut aass SSmithmith aandnd OOsbornesborne ((1996)1996) ppointoint oout,ut, a kkeyey iimplicitmplicit assumptionassumption inin naturalnatural resourceresource damagedamage assessmentassessment isis thatthat thethe replacementreplacement ggoodood isis a perfectperfect substitute.substitute. ThisThis requires,requires, forfor example,example, thatthat anan agentagent bebe indifferentindifferent bbetweenetween ssavingaving a wwildild bbirdird ffromrom bbeingeing kkilledilled bbyy ooilil aandnd ccreatingreating a hhatcheryatchery pprogramrogram tthathat pproducesroduces a bbird.ird.5 FFromrom a ssurveyurvey pperspective,erspective, tthehe aadding-updding-up ttestest iiss pproblematicroblematic ttoo iimplementmplement bbecauseecause tthehe ssurveyurvey fforor tthehe ssecondecond ssub-componentsub-components rrequiresequires rrespondentsespondents ttoo imagineimagine ttheyhey hhaveave rreceivedeceived tthehe fi rstrst goodgood aandnd ttoo iimaginemagine ttheyhey hhaveave ppaidaid fforor tthehe fi rrstst ggoodood wwhenhen aaskedsked aaboutbout wwillingnessillingness ttoo ppayay fforor tthehe ssecondecond ggood.ood. EEvenven pputtingutting mmoraloral andand practicalpractical iimplementationmplementation oobjectionsbjections aaside,side, mmanyany ppeopleeople ddoo nnotot ppassass tthishis aadding-updding-up testtest wwithith mmarketarket ggoods.oods. BBateman,ateman, MMunro,unro, RRhodes,hodes, SStarmer,tarmer, aandnd SSugdenugden ((1997)1997) eexaminedxamined tthishis eexperimentally,xperimentally, uusingsing sstudentstudents aass tthehe ssubjectsubjects aandnd tthehe hhighlyighly ffamiliaramiliar aandnd ffrequentlyrequently cconsumedonsumed ggoodsoods ooff ccoffeeoffee aandnd ppizza.izza. TTheyhey ffailail thethe adding-upadding-up ttest.est. ManyMany storesstores suchsuch asas carcar dealersdealers andand cellcell phonephone providersproviders areare routinelyroutinely successfulsuccessful ssellingelling ccustomersustomers aadditionaldditional ggoodsoods aandnd sserviceservices after ttheyhey ppurchaseurchase tthehe ccarar oorr pphonehone tthathat ttheyhey wwereere nnotot ootherwisetherwise ggoingoing ttoo ppurchase.urchase. GGoodood ccontingentontingent vvaluationaluation sstudiestudies ddoo nnotot engageengage inin thethe surveysurvey equivalentequivalent ooff “upselling”;“upselling”; iinstead,nstead, ttheyhey oofferffer tthehe ccompleteomplete bbundleundle wwhenhen tthehe bbundleundle iiss tthehe rrelevantelevant ggoodood fforor ppolicyolicy ppurposes.urposes.

Diffi culties with the Hypothetical Bias Argument

MManyany eeconomistsconomists iinstinctivelynstinctively tthinkhink tthathat tthehe rresponsesesponses ttoo ccontingentontingent vvaluationaluation qquestionsuestions willwill automaticallyautomatically overvalueovervalue people’speople’s truetrue willingnesswillingness toto paypay forfor publicpublic ggoods.oods. InIn tthehe ccontextontext ooff ccontingentontingent valuationvaluation surveys,surveys, thisthis isis ccalledalled “hypothetical“hypothetical bbias.”ias.” IIronically,ronically, SSamuelsonamuelson ((1954)1954) ssawaw tthehe ooppositepposite pproblemroblem iinn hhisis cclassiclassic aarticlerticle onon ppublicublic ggoodsoods wwhenhen hhee nnoted:oted: ““ItIt iiss iinn tthehe sselfielfi shsh interestinterest ofof eacheach personperson toto givegive falsefalse ssignals,ignals, ttoo ppretendretend ttoo hhaveave llessess iinterestnterest iinn a ggiveniven ccollectiveollective cconsumptiononsumption aactivityctivity tthanhan hhee rreallyeally has,”has,” aandnd hhee ppredictsredicts thatthat hhavingaving thethe publicpublic completecomplete “questionnaires”“questionnaires” atat ddifferentifferent pricesprices wouldwould fallfall preyprey toto thisthis strategicstrategic behavior.behavior. FromFrom Samuelson’sSamuelson’s view,view,

5 The argument is sometimes put forward that anything that is put back physically cannot result in a loss in passive use value. This assumption is equivalent to denying the validity of a loss in utility from pain and suffering associated with a serious automobile injury, as long as the bones are eventually put back in place. In the context of an oil spill, it says agents cannot suffer a utility loss from knowing that animals suffer from being oiled, as long as the animal population and the ecosystem recovers. Because injuries to ecosystems often cannot be completely restored for any plausible cost, proponents of this assumption sometimes advocate the use of “habitat equivalency,” a technique that translates loss in type of habitat into gains in another. This biological measure may be a reasonable proxy for small environmental injuries where the restoration or replacement is done in close proximity (on-site) to the original injury and involves very similar resources (in-kind). However, the approach breaks down for large-scale injuries. As an extreme example, the technique would allow the destruction of all wetlands in San Francisco Bay to be compensated for by restoring some amount of prairie grasslands in Nebraska. More important, perhaps, habitat equivalency has no direct tie to public welfare and, as such, should not be seen as a way of making the public whole. Richard T. Carson 37

tthosehose aansweringnswering contingentcontingent valuationvaluation surveyssurveys aboutabout a publicpublic goodgood shouldshould followfollow a free-riderfree-rider approachapproach ofof pretendingpretending toto bebe lessless interested,interested, hopinghoping thatthat thethe costscosts ofof pprovidingroviding thethe publicpublic goodgood willwill fallfall onon others.others. WhichWhich positionposition doesdoes thethe empiricalempirical eevidencevidence support:support: thethe “hypothetical“hypothetical bias”bias” predictionprediction thatthat surveyssurveys willwill overestimateoverestimate ttruerue willingnesswillingness toto pay,pay, oror thethe Samuelson’sSamuelson’s predictionprediction thatthat strategicstrategic behaviorbehavior willwill lleadead toto anan underestimate?underestimate? TheThe answeranswer isis “both.”“both.” SurveySurvey exercisesexercises presentedpresented asas ppurelyurely hhypotheticalypothetical oror hhavingaving incentivesincentives encouragingencouraging overpledgingoverpledging cancan overesti-overesti- mmateate wwillingnessillingness toto pay.pay. HHowever,owever, contingentcontingent valuationvaluation surveyssurveys thatthat areare designeddesigned soso tthathat participantsparticipants perceiveperceive themthem asas consequentialconsequential withwith a coercivecoercive paymentpayment mecha-mecha- nnismism aandnd a rreasonableeasonable setset ofof auxiliaryauxiliary conditionsconditions (as(as discusseddiscussed earlier)earlier) tendtend to,to, ifif aanything,nything, followfollow Samuelson’sSamuelson’s predictionprediction ofof underestimatingunderestimating thethe truetrue value,value, whenwhen ttheyhey ccanan bbee ccomparedompared ttoo ootherther wwaysays ooff ccalculatingalculating ssuchuch vvalues.alues. SStudiestudies ofof “hypothetical“hypothetical bias”bias” areare oftenoften donedone inin anan experimentalexperimental contextcontext withwith sstudentstudents iinn whichwhich oneone groupgroup ofof subjectssubjects isis toldtold theythey willwill havehave toto paypay andand anotheranother ggrouproup ofof subjectssubjects areare repeatedlyrepeatedly toldtold thatthat responsesresponses areare “purely“purely hypothetical”hypothetical” inin tthehe ssenseense ofof notnot havinghaving anyany effecteffect onon anything.anything. TheThe “hypothetical“hypothetical treatment”treatment” doesdoes ttypicallyypically leadlead toto higherhigher willingnesswillingness toto pay.pay. InIn a meta-analysismeta-analysis ofof suchsuch studies,studies, Murphy,Murphy, AAllen,llen, Stevens,Stevens, andand WeatherheadWeatherhead (2005)(2005) fi ndnd thatthat thethe medianmedian ratioratio ofof estimatedestimated wwillingnessillingness ttoo ppayay fforor ppurelyurely hhypotheticalypothetical ttreatmentsreatments ttoo eestimatedstimated wwillingnessillingness ttoo ppayay iinn thethe actualactual paymentpayment treatmentstreatments isis 1.35,1.35, withwith a smallsmall numbernumber ofof veryvery largelarge outliersoutliers tthathat drivedrive upup thethe meanmean ratio.ratio. SinceSince a goodgood contingentcontingent valuationvaluation studystudy emphasizesemphasizes tthehe chancechance toto inflinfl uenceuence whetherwhether thethe governmentgovernment willwill provideprovide thethe goodgood andand thethe ppaymentayment oobligationsbligations iiff iitt iiss pprovided,rovided, iitt iiss nnotot cclearlear wwhetherhether tthesehese ppurelyurely hhypotheticalypothetical llaboratoryaboratory ccomparisonsomparisons aarere ooff mmuchuch rrelevance.elevance. AAnothernother settingsetting sometimessometimes uusedsed ttoo aassertssert tthathat ccontingentontingent vvaluationaluation ssuffersuffers ffromrom ““hypotheticalhypothetical bias”bias” involvesinvolves comparingcomparing actualactual contributionscontributions toto a voluntaryvoluntary programprogram ttoo tthehe ppropensityropensity ttoo ccontributeontribute eexpressedxpressed inin a ssurveyurvey ccontext:ontext: tthathat iis,s, ppeopleeople ssayay tthathat ttheyhey wwillill ccontributeontribute moremore iinn surveyssurveys thanthan isis aactuallyctually contributed.contributed. ThisThis comparisoncomparison hhasas llongong bbeeneen suspect.suspect. AsAs wewe explainexplain inin CarsonCarson andand GrovesGroves (2007),(2007), thethe mostmost likelylikely ppurposeurpose fforor ddoingoing a ssurveyurvey aaskingsking aaboutbout tthehe llikelihoodikelihood ooff mmakingaking a vvoluntaryoluntary ccontri-ontri- bbutionution isis toto helphelp gaugegauge whetherwhether toto mountmount a fundraisingfundraising effort.effort. IfIf thethe respondentrespondent wwantsants tthehe ggood,ood, thethe optimaloptimal responseresponse isis toto appearappear readyready toto contributecontribute inin thethe surveysurvey ttoo encourageencourage thethe voluntaryvoluntary contributioncontribution campaign—andcampaign—and thenthen toto free-ridefree-ride hopinghoping oothersthers willwill contributecontribute enoughenough toto provideprovide thethe good.good. FromFrom thisthis perspective,perspective, thethe eeconomicconomic ppuzzleuzzle tthenhen iiss nnotot wwhyhy tthehe ssurveyurvey eestimatestimate iiss hhigherigher tthanhan aactualctual ccontribu-ontribu- ttions,ions, bbutut rrather,ather, wwhyhy tthehe ddifferenceifference bbetweenetween tthehe ttwowo eestimatesstimates iiss nnotot llarger.arger.6

6 Similarly, it has long been known that surveys of purchase intentions for new products in private markets tend to over-forecast actual purchases. In Carson and Groves (2007), we show that this result is theoretically predictable—respondents who potentially want to purchase the good should say “yes” to increase the likelihood that it is offered for sale, at which time they can then decide whether to buy. When people are surveyed about their likelihood of buying a private good that is already being offered for sale, respondents tend to have a lower propensity to buy in the survey than they do in markets. This effect is also in the predicted direction since respondents want to encourage fi rms to lower prices. For an interesting example involving existing toll roads where surveys underpredict usage, see Small, Winston, and Yan (2005). 38 Journal of Economic Perspectives

WWithith qquasi-publicuasi-public goods,goods, itit isis possiblepossible toto comparecompare estimatesestimates fromfrom contingentcontingent vvaluationaluation studiesstudies withwith ootherther wwaysays ooff eestimatingstimating vvaluesalues tthroughhrough ssomeome fformorm ooff rrevealedevealed ppreferencereference forfor publicpublic goods.goods. ForFor eexample,xample, tthehe ““traveltravel ccostost mmethod”ethod” iinvolvesnvolves ppeopleeople ffacingacing differentdifferent traveltravel costscosts forfor visitingvisiting a certaincertain place—likeplace—like a recreationalrecreational fi shingshing ssite.ite. TThishis ppricerice ((inin ttermserms ooff ttravelravel ccosts)osts) fforor ggoingoing ttoo tthathat ssiteite ccanan bbee uusedsed iinn cconjunc-onjunc- ttionion withwith thethe numbernumber ofof tripstrips toto thatthat sitesite toto estimateestimate a demanddemand curvecurve and,and, inin turn,turn, wwillingnessillingness toto paypay forfor a triptrip toto thethe site.site. TheThe “hedonic“hedonic pricing”pricing” methodmethod cancan bebe usedused wwithith hhousingousing ppricesrices tthathat iincorporatencorporate spatiallyspatially delineateddelineated amenities.amenities. StatisticalStatistical mmethodsethods ccanan bbee uusedsed ttoo ccontrolontrol fforor ootherther aattributesttributes ooff tthehe hhome,ome, llikeike tthehe nnumberumber ooff bbedrooms,edrooms, inin suchsuch a wwayay tthathat aann eestimatestimate ooff tthehe vvaluealue ooff tthehe eenvironmentalnvironmental aamenitymenity ccanan bebe obtained.obtained. TheThe soso - calledcalled “averting-behavior“averting-behavior approach”approach” lookslooks atat whatwhat peoplepeople sspendpend toto avoidavoid anan adverseadverse effecteffect andand allowsallows thethe researcherresearcher toto backback outout a derivedderived ddemandemand fforor rreducingeducing iit.t. IInn Carson,Carson, Flores,Flores, Martin,Martin, andand WrightWright (1996),(1996), wewe conductedconducted a meta-analysismeta-analysis ooff 8833 sstudiestudies tthathat includedincluded 616616 comparisonscomparisons ofof contingentcontingent valuationvaluation estimatesestimates toto rrevealedevealed preferencepreference estimatesestimates usingusing thesethese kindskinds ofof methods.methods. WeWe foundfound thatthat thethe mmeanean ratioratio ofof contingentcontingent valuationvaluation toto revealedrevealed preferencepreference estimatesestimates isis 0.890.89 (with(with a 9595 percentpercent conficonfi dencedence intervalinterval ofof [0.81–[0.81– 0.96]),0.96]), suggestingsuggesting thatthat contingentcontingent valu-valu- aationtion estimatesestimates inin thethe casecase ofof quasi-publicquasi-public goodsgoods areare onon averageaverage a bitbit lowerlower thanthan rrevealedevealed preferencepreference estimatesestimates andand rreasonablyeasonably correlatedcorrelated (0.78)(0.78) withwith them.them.7 SSinceince tthathat study,study, otherother paperspapers havehave lookedlooked atat valuingvaluing specifispecifi c classesclasses ofof goodsgoods usingusing ccontingentontingent valuationvaluation andand revealedrevealed preferencepreference approachesapproaches andand examinedexamined whetherwhether tthehe ddetailsetails ofof thethe approachapproach makemake a difference.difference. ForFor instance,instance, thethe valuevalue ofof statisticalstatistical llifeife eestimatesstimates ffromrom ccontingentontingent vvaluationaluation sstudiestudies aarere ooff tthehe ssameame oorderrder ooff mmagnitudeagnitude aass thosethose fromfrom hedonichedonic wagewage studiesstudies usingusing jobjob risks,risks, butbut smallersmaller (Kochi,(Kochi, Hubbell,Hubbell, aandnd KramerKramer 2006).2006). Shrestha,Shrestha, Rosenberger,Rosenberger, andand LoomisLoomis (2007)(2007) performperform a meta-meta- aanalysisnalysis ofof studiesstudies onon a largelarge databasedatabase ofof outdooroutdoor recreationrecreation valuationvaluation estimates.estimates. TTheyhey fi ndnd thatthat contingentcontingent valuationvaluation estimatesestimates areare signifisignifi cantlycantly lowerlower onon averageaverage tthanhan ccomparableomparable eestimatesstimates bbasedased oonn rrevealedevealed ppreferencereference mmethods.ethods. YYetet anotheranother approachapproach isis toto looklook atat thethe smallsmall numbernumber ofof U.S.U.S. studiesstudies wherewhere a ccontingentontingent valuationvaluation surveysurvey withwith (nearly)(nearly) identicalidentical wordingwording toto anan actualactual ballotballot ppropositionroposition cancan bebe comparedcompared toto thethe actualactual vote.vote. LikeLike manymany environmentalenvironmental goods,goods, tthesehese ballotballot propositionspropositions tendtend toto involveinvolve a mixmix ofof directdirect andand passivepassive use.use. AsAs Kling,Kling, PPhaneuf,haneuf, andand ZhaoZhao note,note, thethe comparisonscomparisons betweenbetween thethe contingentcontingent valuationvaluation esti-esti- mmatesates andand actualactual votesvotes areare quitequite favorable,favorable, andand theythey areare clearlyclearly conservativeconservative whenwhen ““don’tdon’t knows”knows” areare treatedtreated asas “no’s”“no’s” (the(the standardstandard practicepractice inin thethe contingentcontingent valu-valu- aationtion literature).literature). ThisThis shouldshould notnot bebe surprising.surprising. PublicPublic pollspolls takentaken nearnear anan actualactual vvote,ote, wwhenhen tthehe iinformationnformation setset isis uunlikelynlikely ttoo cchange,hange, areare onon averageaverage quitequite goodgood ppredictorsredictors ofof two-candidatetwo-candidate racesraces andand ballotballot propositions.propositions. PredictingPredicting votervoter turnoutturnout

7 The median ratio is somewhat lower at 0.75. There is a clear publication bias in studies comparing contingent valuation to revealed preferences estimates: published studies tend to either fi nd a ratio of the two estimates close to one or a ratio that is very large. This two-humped distribution of published results suggests two very divergent expectations among economists, and that results can be cherry-picked to support a particular position. Contingent Valuation: A Practical Alternative when Prices Aren’t Available 39

iiss generallygenerally a harderharder tasktask thanthan predictingpredicting howhow peoplepeople areare goinggoing toto votevote conditionalconditional oonn tthehe iinformationnformation ttheyhey hhave.ave.

Determining the Quality of a Contingent Valuation Study

A recurringrecurring themetheme ofof thisthis essayessay hashas beenbeen thatthat high-qualityhigh-quality contingentcontingent valuationvaluation ssurveysurveys aappearppear ttoo pproduceroduce hhigh-qualityigh-quality economiceconomic data.data. HowHow doesdoes oneone separateseparate thethe wwheatheat fromfrom tthehe cchaff?haff? SSurveyurvey rresearchersesearchers pointpoint outout tthathat tthehe mmostost iimportantmportant tthinghing ttoo llookook aatt iiss tthehe ““faceface vvalidity”alidity” ooff tthehe eentirentire ccontingentontingent vvaluationaluation ssurveyurvey iinstrument.nstrument. DDoesoes thethe surveysurvey crediblycredibly posepose a well-developedwell-developed policypolicy proposalproposal toto respondentsrespondents andand pproviderovide themthem withwith thethe necessarynecessary informationinformation toto makemake anan informedinformed decisiondecision aboutabout iit?t? DoesDoes thethe surveysurvey makemake respondentsrespondents comfortablecomfortable makingmaking a decisiondecision toto eithereither ssupportupport oror opposeoppose thethe policypolicy proposalproposal andand makemake themthem awareaware ofof thethe consequencesconsequences iiff tthehe ppolicyolicy iiss iimplemented?mplemented? TThehe bbestest ccontingentontingent valuationvaluation surveyssurveys areare amongamong thethe bbestest ssurveyurvey iinstrumentsnstruments currentlycurrently beingbeing administeredadministered whilewhile thethe worstworst areare amongamong tthehe worst.worst. InIn thethe handshands ofof anan expertexpert inin questionnairequestionnaire design,design, faceface validityvalidity isis notnot hhardard ttoo judge.judge. EconomistsEconomists areare notnot typicallytypically trainedtrained withwith thesethese skillsskills soso theirtheir judg-judg- mmentsents maymay nneedeed ttoo bbee ssupplementedupplemented bbyy tthosehose ooff ppeopleeople wwhoho ddoo hhaveave tthehe rrequisiteequisite ttraining.raining. EconomistsEconomists cancan judgejudge wwhetherhether a cchoicehoice iiss cconsequentialonsequential aandnd wwhenhen cchoiceshoices wwillill rrevealeveal tthehe ddesiredesired tradeoffs.tradeoffs. NNext,ext, tturnurn ttoo tthehe surveysurvey developmentdevelopment effort.effort. AskAsk whetherwhether adequateadequate develop-develop- mmentent aandnd ttestingesting wworkork wwasas ddoneone iinn a ddeliberate,eliberate, nnotot pproro fforma,orma, mmanner.anner. LLookook aatt tthehe ssurveyurvey aadministrationdministration andand sampling.sampling. TheThe ArrowArrow etet al.al. (1993)(1993) NOAANOAA PanelPanel ReportReport rrecommendedecommended thatthat surveyssurveys beingbeing donedone forfor litigationlitigation useuse in-personin-person interviewsinterviews withwith eexperiencedxperienced professionalprofessional interviewersinterviewers toto helphelp motivatemotivate respondentsrespondents toto paypay closeclose aattentionttention toto thethe detailsdetails ofof thethe scenario,scenario, andand thatthat thesethese surveyssurveys alsoalso havehave a rigorousrigorous ssamplingampling pplanlan tthathat iiss wwellell eexecuted.xecuted. ThisThis isis aann eenormouslynormously expensiveexpensive undertaking,undertaking, ssoo iitt iiss hhereere tthathat oonene iiss mmostost llikelyikely ttoo sseeee eeffortsfforts ttoo rreduceeduce ccost.ost. WWhathat aarere tthehe iimplica-mplica- ttionsions ooff tthehe ssurveyurvey iimplementationmplementation cchoiceshoices mmade?ade? 8 NNowow looklook atat thethe basicbasic resultsresults ofof thethe completedcompleted survey:survey: TakingTaking samplingsampling errorerror iintonto aaccount,ccount, ddoesoes tthehe ppercentercent ooff rrespondentsespondents wwillingilling ttoo ppayay tthehe rrandomlyandomly aassignedssigned ccostost amountamount ffallall aass tthathat aamountmount iincreases?ncreases? IIss tthehe eestimatestimate ooff wwillingnessillingness ttoo ppayay dderivederived usingusing a sstatisticaltatistical ttechniqueechnique tthathat iiss rrobustobust ttoo aassumptionsssumptions aaboutbout tthehe ffarar rrightight ttailail ofof thethe distribution?distribution? DoesDoes thethe studystudy presentpresent a constructconstruct validityvalidity equationequation thatthat eexplainsxplains a reasonablereasonable amountamount (in(in a cross-sectionalcross-sectional sense)sense) ofof thethe heterogeneityheterogeneity inin eestimatedstimated willingnesswillingness toto paypay andand a comprehensivecomprehensive setset ofof sensitivitysensitivity analyses?analyses? DoesDoes tthehe estimateestimate ffromrom tthehe sstudytudy rrepresentepresent a ssensibleensible ttradeoffradeoff tthathat ppeopleeople mmightight mmakeake ttoo iimplementmplement tthehe ppolicyolicy iinn qquestion?uestion?

8 There is a lively debate in the literature over how to best deliver high-quality valuation estimates at lower costs, which is no surprise since the key question facing an agency doing a benefi t–cost analysis is the value of spending a marginal dollar on a particular analysis and in allocating that dollar to one part of that analysis versus another. 40 Journal of Economic Perspectives

Concluding Remarks

CContingentontingent vvaluationaluation iiss nnotot pperfect.erfect. NNoo eeconomicconomic ttechniqueechnique iis.s. BButut tthehe aalterna-lterna- ttiveive ttoo ccontingentontingent vvaluation,aluation, eespeciallyspecially iinn ccasesases iinvolvingnvolving ppassiveassive uusese cconsiderations,onsiderations, iiss ttoo placeplace a zerozero valuevalue onon goodsgoods thatthat thethe publicpublic carescares about—whichabout—which isis nevernever likelylikely ttoo bbee tthehe rrightight cchoice.hoice. IInn tthehe ttwowo ddecadesecades ssinceince tthehe Exxon Valdez ooilil spill,spill, thethe amountamount ofof researchresearch under-under- ttakenaken onon contingentcontingent valuationvaluation hashas beenbeen ssubstantial,ubstantial, includingincluding manymany tthoughtfulhoughtful aassessmentsssessments startingstarting withwith thethe ArrowArrow etet al.al. (1993)(1993) NOAANOAA PanelPanel ReportReport byby govern-govern- mmentent aagenciesgencies aandnd iinternationalnternational oorganizationsrganizations ((forfor eexample,xample, AAtkinson,tkinson, PPearce,earce, aandnd MMouratoourato 2006).2006). TheThe debatedebate insideinside academicacademic circlescircles hashas oftenoften beenbeen acrimonious,acrimonious, bbutut uultimatelyltimately pproductive.roductive. TheThe bigbig issuesissues concerningconcerning thethe reliabilityreliability ofof contingentcontingent vvaluationaluation raisedraised byby criticscritics inin thethe earlyearly 1990s1990s havehave beenbeen resolvedresolved favorablyfavorably withwith rrespectespect toto thethe useuse ofof contingentcontingent valuationvaluation oror havehave beenbeen shownshown toto involveinvolve genericgeneric bbehavioralehavioral effectseffects thatthat alsoalso rroutinelyoutinely ccharacterizeharacterize marketmarket ddata.ata. A cconsiderableonsiderable bbodyody ooff eevidencevidence nnowow ssupportsupports tthehe vviewiew tthathat ccontingentontingent vvaluationaluation ddoneone aappropriatelyppropriately ccanan pproviderovide a reliablereliable basisbasis forfor gauginggauging whatwhat thethe publicpublic isis willingwilling toto tradetrade offoff toto obtainobtain wwell-defiell-defi nedned publicpublic goods.goods. TheThe timetime hashas comecome toto movemove beyondbeyond endlessendless debatesdebates thatthat sseekeek ttoo ddiscreditiscredit ccontingentontingent vvaluationaluation aandnd ttoo ffocusocus insteadinstead onon makingmaking itit better.better.

■ I have received no compensation from any party for writing this article. However, over the last 30 years I have conducted contingent valuation studies for a number of local, state, and federal agencies as well as for foreign governments and international organizations. I have worked and continue to work for government agencies on natural resource damage assessments, including serving as principal investigator on the economic portion of the government’s damage assessment for the Exxon Valdez oil spill. Helpful comments were received from the editors, David Autor, John List, and Timothy Taylor as well as from Michael Hanemann and V. Kerry Smith.

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