Integrating the Community Perspective: An exploration of Prospect Theory as a tool to derive benefits in Negotiated Agreements by Alejandra Tobar B.A. (Hons.), University of Toronto, 2015 Project Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Resource Management in the Simon Fraser University Faculty of Resource and Environmental Management Project No. 739 © Alejandra Tobar 2019 SIMON FRASER UNIVERSITY Fall 2019 Copyright in this work rests with the author. Please ensure that any reproduction or re-use is done in accordance with the relevant national copyright legislation. Approval Name: Alejandra Tobar Degree: Master of Resource Management Title: Integrating the Community Perspective: An exploration of Prospect Theory as a tool to derive benefits in Negotiated Agreements Project No. 739 Examining Committee: Chair: Jesus, Pulido PhD in Resource Management Candidate Duncan Knowler Senior Supervisor Associate Professor Gretchen Ferguson Supervisor Professor Date Defended/Approved: November 8, 2019 ii Ethics Statement iii Abstract This paper provides an overview of negotiated agreements as strategies for community engagement in conjunction with insights from the field of behavioral economics, specifically Prospect Theory. Prospect Theory posits that losses are valued more than gains from a reference state and result in large valuation disparities in experimental studies. This study estimates valuation disparities within compensating and equivalent variation measures of WTP and WTA in a structured field experiment. A case study undertaken in Loreto, Baja California Sur, explores interactions between tourism development and impacts to household water security. The study finds moderate valuation disparities ranging from 1.09 to 1.15 that were statistically significant when maximum likelihood estimation was used. The paper then discusses whether applied Prospect Theory can function as a tool to derive benefits within negotiated agreement frameworks.The research concludes that participating communities may benefit from being able to retain a greater share of development benefits at local scales. Keywords: contingent valuation; willingness to pay; willingness to accept; impact benefit agreements; water security iv Acknowledgement I would like to acknowledge and thank the residents, academics and community representatives of Loreto who lent their time and insights during the conduct of this research. Specifically, I would like to thank EcoAlianza and the Autonomous University of Baja California Sur for providing much appreciated support and facilities in the development and execution of the fieldwork. I would like to thank my supervisor, Dr. Duncan Knowler, for his mentorship and input throughout all aspects of this project, but particularly during key moments as the research evolved in the field. I appreciate the time he dedicated to the project, both on campus as well as during the critical field stage. I would also like to thank Dr. Victor Hernandez and Dr. Salvador Garcia Martinez for their time and guidance. The advice, support and insights received throughout were invaluable and it was a pleasure working with them. As well I would like to thank the rest of my professors and REM faculty with whom I have worked to develop this research project over the last couple of years. I would like to thank my family for their unfailing support and for planning many excellent trips during this endeavor. I would especially like to thank Jake for your encouragement and ears. Finally, thanks to MITACS for providing funding for the research. v Table of Contents Approval .......................................................................................................................... ii Ethics Statement ............................................................................................................ iii Abstract .......................................................................................................................... iv Acknowledgement ........................................................................................................... v Table of Contents ........................................................................................................... vi List of Tables .................................................................................................................. ix List of Figures.................................................................................................................. x List of Acronyms ............................................................................................................. xi Chapter 1. Introduction .............................................................................................. 1 1.1. Problem Statement ................................................................................................ 1 1.2. Case Study ............................................................................................................ 3 1.3. Research Purpose ................................................................................................. 4 1.4. Research Questions .............................................................................................. 5 1.5. Organization of the Study ...................................................................................... 5 Chapter 2. Literature Review ..................................................................................... 7 2.1. Negotiated Agreements ......................................................................................... 7 2.1.1. Benefits and Challenges .............................................................................. 10 2.1.2. Compensation as Mitigation ......................................................................... 12 2.2. Economic Measures of Welfare ........................................................................... 13 2.2.1. Behavioural Economics and Prospect Theory.............................................. 16 2.2.2. The Valuation Disparity ................................................................................ 18 2.2.3. Water Supply Valuation Studies .................................................................. 20 Chapter 3. Background ............................................................................................ 24 3.1. Study Area Description ........................................................................................ 24 3.2. Tourism in Loreto ................................................................................................. 25 3.3. Water Security in Loreto ...................................................................................... 28 3.3.1. Broad Water Security in Loreto .................................................................... 29 3.3.2. Narrow Water Security in Loreto .................................................................. 30 Chapter 4. Methodology ........................................................................................... 34 4.1. Contingent Valuation Method............................................................................... 34 4.2. Survey Design ..................................................................................................... 34 4.2.1. Sampling Considerations ............................................................................. 35 4.2.2. The Questionnaire ....................................................................................... 36 4.2.3. Limitations of the Household Survey ............................................................ 37 4.3. Contingent Valuation Scenarios ........................................................................... 38 4.3.1. Utility Functions ........................................................................................... 41 4.3.2. Welfare Elicitation Format ............................................................................ 42 4.4. Statistical Analyses .............................................................................................. 43 4.4.1. Comparative Analysis .................................................................................. 44 vi 4.4.2. Interval Data Models .................................................................................... 46 4.4.3. Regression Variables ................................................................................... 47 4.5. Scale of Analysis ................................................................................................. 49 Chapter 5. Results .................................................................................................... 50 5.1 Demographic Characteristics ............................................................................... 50 5.1. Household Water Use ......................................................................................... 52 5.2. Networks of Information ....................................................................................... 54 5.3. Community Cohesion .......................................................................................... 55 5.4. Attitudes and Perceptions .................................................................................... 56 Tourism .................................................................................................................. 56 Negotiated Agreements ........................................................................................