Asking for Individual or Household Willingness to Pay for Environmental Goods? Implication for aggregate welfare measures

Lindhjem, Henrik and Navrud, Ståle (2008): Asking for Individual or Household Willingness to Pay for Environmental Goods? Implication for aggregate welfare measures. Published in: Environmental and Resource Economics , Vol. 1, No. 43 (2009): pp. 11-29.

Abstract

The aggregate welfare measure for a change in the provision of a public good derived from a contingent valuation (CV) survey will be much higher if the same elicited mean willingness to pay (WTP) is added up over individuals rather than households. A trivial fact, however, once respondents are part of multi-person households it becomes almost impossible to elicit an “uncontaminated” WTP measure that with some degree of confidence can be aggregated over one or the other response unit. The literature is mostly silent about which response unit to use in WTP questions and in some CV studies it is even unclear which type has actually been applied. We test for differences between individual and household WTP in a novel, web-administered, split-sample CV survey asking WTP for preserving biodiversity in old-growth coniferous forests in Norway. Two samples are asked both types of questions, but in reverse order, followed by a question with an item battery trying to reveal why WTP may differ. We find in a between-sample test that the WTP respondents state on behalf of their households is not significantly different from their individual WTP. However, within the same sample, household WTP is significantly higher than individual WTP; in particular if respondents are asked to state individual before household WTP. Our results suggest that using individual WTP as the response unit would overestimate aggregate WTP, and thus bias welfare estimates in benefit-cost analyses. Thus, the choice of response format needs to be explicitly and carefully addressed in CV questionnaire design in order to avoid the risk of unprofitable projects passing the benefit-cost test

• Item Type: MPRA Paper
• Language: English
• Keywords: Contingent valuation, household, individual, WTP
• Subjects: H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q57 - Ecological Economics: Ecosystem Services ; Biodiversity Conservation ; Bioeconomics ; Industrial Ecology

References

Arrow K J, Solow R, Leamer E, Portney P, Radner R and Schuman H (1993) Report of the NOAA Panel on Contingent Valuation. Federal Register 58: 4601-4614.

Banzhaf H S, Burtraw D, Evans D and Krupnick A (2006) Valuation of natural resource improvements in the Adirondacks. Land Economics 82(3): 445-464.

Bateman I, Cole M, Cooper P, Georgiou S, Hadley D and Poe G L (2004) On visible choice sets and scope sensitivity. Journal of Environmental Economics and Management 47: 71-93.

Bateman I and Munro A (2003) Non-cooperative decision-making and measures of household surplus

Bateman I and Munro A (2006) Household versus individual valuation: what’s the difference? Kyoto, Japan

Bateman I J, Carson R T, Day B, Hanemann W M, Hanley N, Hett T, Jones-Lee M, Loomes G, Mourato S, Ozdemiroglu E, Pearce D W, Sugden R and Swanson T (2002) Economic Valuation with Stated Preference Techniques: A Manual. Edward Elgar Publishing, Cheltenham, 480pp.

Becker G S (1973) A theory of marriage: Part I. Journal of Political Economy 81: 813-846.

Becker G S (1981) A Treatise on the Family (Enlarged edition). Harvard University Press.

Beharry N and Scarpa R (2006) Joint vs separate decisions by couples in choice experiments: The case of coastal water quality in Tobago. Kyoto, Japan

Bergstrom T C (1994) A survey of theories of the family, University of Michigan

Bergstrom T C (2003), Benefit Cost Analysis and the Entanglements of Love. PROCEEDINGS OF SESSION II: HOUSEHOLD DECISION MAKING.

Boyle K J (2003) Contingent valuation in practice. In: P. A. Champ, K. J. Boyle and T. C. Brown, eds, A primer on nonmarket valuation. Kluwer Academic Publishers

Cameron T A and Huppert D D (1989) Ols Versus Ml Estimation Of Non-Market Resource Values With Payment Card Interval Data. Journal of Environmental Economics and Management 17(3): 230-246.

Carson R T, Flores N E and Meade N F (2001) Contingent valuation: Controversies and evidence. Environmental and Resource Economics 19(2): 173-210.

Delaney L and O'Toole F (2004) Irish Public Service Broadcasting: A Contingent Valuation Analysis. The Economic and Social Review 35: 321-350.

Delaney L and O'Toole F (2006) Willingness to pay: individual or household? Journal of Cultural Economics 30: 305-309.

Delaney L and O'Toole F (In press) Individual, household and gender preferences for social transfers. Journal of Economic Psychology.

Dosman D and Adamowicz W (2006) Combining stated and revealed preference data to construct an empirical examination of intrahousehold bargaining. Review of Economics of the Household 4: 15-34.

Dupont D P (2004) Do children matter? An examination of gender differences in environmental valuation. Ecological Economics 49(3): 273-286.

Efron B (1997) Bootstrap methods: Another look at the jacknife. Annals of Statistics 7: 1-26.

Hasler B, Jacobsen J B, Lundhede T H, Martinsen L and Thorsen B J (2008) Household versus Individual Willlingness to Pay: Evidence from a Choice Experiment on Environmental Valuation

Hensher D, Shore N and Train K (2005) Households’ Willingness to Pay for Water Service Attributes. Environmental & Resource economics 32: 509-531.

Li H, Berrens R P, Bohara A K, Jenkins-Smith H C, Silva C L and Weimer D L (2005) Testing for budget constraint effects in a national advisory referendum survey on the Kyoto protocol. J. Agric. Resour. Econ. 30(2): 350-366.

Lindhjem H (2007) 20 Years of stated preference valuation of non-timber benefits from Fennoscandian forests: A meta-analysis. Journal of Forest Economics 12: 251-277.

Lundberg S J, Pollak R A and Wales T J (1997) Do Husbands and Wives Pool Their Resources? Evidence from the United Kingdom Child Benefit. The Journal of Human Resources 32(3).

Mitchell R C and Carson R T (1989) Using Surveys to Value Public Goods: The Contingent Valuation Method. Resources for the Future, Washington DC.

Munro A (2005) Household willingness to pay equals individual willingness to pay if and only if the household income pools. Economics Letters 88(2): 227-230.

Pahl J (1995) His money, her money: Recent research on financial organisation in marriage. Journal of Economic Psychology 16: 361-376.

Pollak R A (2003) Gary Becker's contributions to family and household economics. Review of Economics of the Household 1: 111-141.

Quiggin J (1998) Individual and household willingness to pay for public goods. American Journal of Agricultural Economics 80: 58-63.

Samuelson P A (1956) Social Indifference Curves. The Quarterly Journal of Economics 70(1): 1-22.

SEPA (2006) An instrument for assessing the quality of environmental valuation studies. Swedish Environmental Protection Agency,

Smith V K and Van Houtven G (1998) Non-Market Valuation and the Household, RFF

Smith V K and Van Houtven G (2004) Recovering Hicksian consumer surplus within a collective model: Hausman's method for the household. Environmental and Resource Economics 28(2): 153-167.

Strand J (2005) Individual and household values of mortality reductions with intrahousehold bargaining. Journal of Risk and Uncertainty 31(2): 217-236.

Strand J (2007) Public-good valuation and intrafamily allocation. Environmental and Resource Economics 38(4): 527-543.

Teal G A and Loomis J (2000) Effects of gender and parental status on the economic valuation of increasing wetlands, reducing wildlife contamination and increasing salmon populations. Society and Natural Resources 13(1): 1-14.

Thaler R H (1999) Mental accounting matters. Journal of Behavioral Decision Making 12(3): 183-206.

Veisten K, Hoen H F and Strand J (2004) Sequencing and the adding-up property in contingent valuation of endangered species: Are contingent non-use values economic values? Environmental and Resource Economics 29(4): 419-433.

Vermeulen F (2002) Collective household models: principles and main results. Journal of Economic Surveys 16(4): 533-64.

Webley P (1995) Accounts of accounts: En route to an economic psychology of personal finance. Journal of Economic Psychology 16: 469-475.

Winnett A and Lewis A (1995) Household accounts, mental accounts, and savings behaviour: Some old economics rediscovered? Journal of Economic Psychology 16: 431-448.