Cvmbasics.doc and .pdf: Morey Oct 23, 2014 1 What is the contingent valuation method, CVM? Cvmbasic.doc Oct 23, 2014 and cvmbasic.pdf Next class could you find and bring me an advertisement for a lost pet? I will add a point to your next quiz if you bring me an ad CVM is a nonmarket-valuation method that is used to value specific changes from the status quo. CVM estimates total value (use and nonuse) Environmental economists often use it to value environmental policies or damages; e.g. determining wtp to assure that there is not another large oil spill of the Exxon Valdez or BP type. How much is an individual damaged by a polluted river? CVM is a stated-preference technique, as in the individual “states” his preference.1 Specifically, in the CVM individuals are asked about the status quo versus some alternative state of the world, and information is elicited about how the individual “feels” about the alternative relative to the status quo, and their WTP, if anything, for the alternative. Note that while the next cartoons are sick, as I prefer, they, strictly speaking, are not examples of CVM because they are note “contingent”/hypothetical. The word “contingent” in the expression CVM means hypothetical. 1 In contrast to the revealed preference techniques like travel cost and hedonics where value is estimated based on what people do (their behavior) rather than what they say. Contrast the observation that I buy Wanda Sue expensive jewelry and fulfill her every wish, with my statement that “I love Wanda Sue.”Cvmbasics.doc and .pdf: Morey Oct 23, 2014 2Cvmbasics.doc and .pdf: Morey Oct 23, 2014 3 There are many different types of CVM questions. For example: • “What is your max you would pay to create four self-sustaining wolf packs in four remote areas of Colorado?” This type of question is called “open-ended” CVM, “open” because the respondent is open to say any amount that they want. • “Creating four self-sustaining wolf packs in four remote areas of Colorado will increase your state taxes by $10 a year for five years. Would you vote for such a proposal?” This is a “referendum CVM” question—$ amounts vary across respondents.2 • “On the following payment card (a card with a bunch of different $ amounts) circle the largest amount you would be willing to pay to create four self-sustaining wolf packs in four remote areas of Colorado.” This is a “payment-card” question. • Bidding: I ask, “Would you pay $1 to create four self-sustaining wolf packs in four remote areas of Colorado?” If you say “yes”, I can ask about $2. If you say yes to $2, then I ask a larger amount, etc. Questions stop when you say no. Can also play this game starting with a large amount and work down. A Referendum CVM question is a single choice question where one of the alternatives is the status quo. 2 Here in Colorado, we often have referendum on the ballot. Ballot referendums are binding (non-contingent) in the sense that if a certain percentage votes for the referendum, it becomes policy (law).Cvmbasics.doc and .pdf: Morey Oct 23, 2014 4 In theory, what does each of these question types tell the researcher about the individual’s wtp to reintroduce wolves in Colorado? In order: The individual’s wtp Whether the individual’s wtp is greater or less than the stated amount A range on the individual’s wtp A range …. CVM questions, like all survey questions, are difficult to ask well. Before the CVM question is asked, individuals are presented with background and explanatory material, and often asked other questions.Cvmbasics.doc and .pdf: Morey Oct 23, 2014 5 A few of the worries about the CVM • Individuals do not necessarily have a strong incentive to think seriously about their answer because they will not be penalized for answering foolishly.3 • Individuals who take such questions seriously might have an incentive to lie (distort their answer—the bias can go in either direction) Not taking the question seriously adds noise to the data, not bias Lying adds bias – bias is a bigger concern than noise. Why might someone vote yes to a referendum CVM question even though their WTP is less than the bid amount? Why might someone vote no to a referendum CVM question even though their WTP is greater than the bid amount? Note that there is also noise and potential bias in RP data. We do not always buy the utility-maximizing bundle—we make mistakes, some costly. There are many issues, lack of information, uncertainty, emotional state, etc.4 It is three in the morning, I have drank a large quantity of wine, am now eating chips and watching reruns of Gilligan’s Island on TBS. A week later UPS dumps a Vegematic machine and a Bow Flex workout machine on my front porch. My credit card gets docked $49.99 a month for 24 months. See the last footnote. 3 Note the market punishes the rash individual who pays more than their WTP: the purchase decreases his utility. Some economists worry a lot that CVM does not give the respondent a strong incentive to answer correctly. Others worry less about this. Since the payment is hypothetical there is no incentive to strategically state an amount less than WTP. 4 Simple economic consumer theory assumes that individuals always behave rationally, but there is a lot of evidence that this is not the case.Cvmbasics.doc and .pdf: Morey Oct 23, 2014 6 In terms of the different CVM methods, referendum CVM has the highest standing. • The question elicits value as it is elicited in the market place. In the marketplace one does not have to determine one’s exact WTP, only whether it is greater or less than the stated amount. • Referendum CVM is identical to a ballot referendum, except the question is hypothetical. • It was endorsed by a NOAA “blue ribbon” panel of Nobel Laureates in economics for use in legal cases. • Different individuals are presented with different dollar amounts (the researcher sees what proportion of respondents say yes to each amount – proportion of yeses on the vertical axis, bid amounts on the horizontal axis) Draw an example • Sometimes the CVM question is double bounded, or one and “one-half bounds,” or whatever.5 INSERT here link to a CVM referendum survey. 5 Doubled bounded means that if you answer yes (no) to $x, you are then asked about a higher (lower) amount. I forget what