Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

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See Blumenschein et al. (2008) for a review of the methods developed to tackle hypothetical
bias in contingent valuation.
ii) Protest valuations
Respondents with a positive true WTP may put forward a zero stated valuation due to, for
example, ethical objections to the idea of paying for the good under consideration. If such
respondents are not identified through follow up questions, and their responses consequently
excluded from the statistical analysis, then biased estimates of the value of the good will result.
Hanley and Shrogen (2005) suggest that protest values can be reduced by making WTA
scenarios more acceptable by specifiying community-level compensation rather than individual
compensation ―if individuals are adverse to the idea of benefiting personally in money terms‖
(p.16).
iii) WTP-WTA disparity
All stated preference survey choices and questions can be presented in terms of WTP (to receive
a good or prevent a loss) or in terms of WTA (to lose a good or incur a loss). In theory, WTA for
most goods evaluated under Stated Preferences should exceed WTP by a few percentage points
due to the fact that WTP is constrained by an individual‘s income (Sugden, 2005). Numerous
papers have found, however, that stated WTP is often far below stated WTA for the same good
(Shogren et al, 1994; Horowitz and McConnell, 2002). Sugden (2005) argues that the most
credible explanations for this relate to the psychological arguments concerning loss aversion and
its derivative; the endowment effect (Kahneman and Tversky, 1979; Loewenstein and Adler,
1995; Ariely, 2009).
Some authors argue that the appropriate formation depends on property rights (Carson et al,
2001). That is, if the respondent does not currently have the good and does not have a legal
entitlement to it, the WTP formation should be used. On the other hand, if the consumer is
being asked to give up a legal entitlement, the WTA formation is appropriate (Carson, 2000).
Following this approach means therefore that legal property rights can have a substantial
influence on the estimated welfare effects of interventions.
Other authors have argued that the WTP formulation should always be used (Arrow et al.,
1993). One reason for this is that CV studies adopting a WTA formulation have often been
unsuccessful due to an inability to convince respondents that they have the right to sell a nonmarket
good (Mitchell and Carson, 1989). The WTP-WTA disparity may also be, to some extent,
a product of informational constraints and inexperience. Bateman et al.‘s (2009) virtual reality
survey tool described above reduced the difference between WTP and WTA for environmental
goods. List (2003) finds that experienced traders (in a number of different real markets) do not
exhibit the endowment effect. The WTP-WTA disparity may be reduced by re-calibrating WTP
values into WTA amounts (List and Shrogen, 2002).
iv) Costly
Stated preference studies can be both financially costly and time-consuming. They require focus
group and interviews to determine respondents‘ understanding, and pre-tests (Carson 2000;
Mitchell and Carson, 1989; Bateman et al, 2002). DTLR (2002), although noting that it is
difficult to generalise, state that, ―it is unlikely that reliable research for a single sample study can
be carried out for less than £25-£30,000 (excluding the field survey costs)‖.
v) Survey-related biases