Academic journal article Journal of Agricultural and Resource Economics

The Payment Vehicle Used in CV Studies of Environmental Goods Does Matter

Academic journal article Journal of Agricultural and Resource Economics

The Payment Vehicle Used in CV Studies of Environmental Goods Does Matter

Article excerpt

This paper examines the effect of the payment vehicle on the valuation of an environmental good with the contingent valuation method (CVM). Results from three CV studies comparing different payment vehicles by using split samples when valuing environmental encroachment caused by roads in Sweden are presented and compared to results from other such split-sample studies of payment vehicle effects. The results are consistent and show that the payment vehicle affects the valuation, but not always the way expected when considering incentives to behave strategically.

Key words: CVM, payment vehicle, split-sample tests, valuation

Introduction

Stated preference (SP) studies, which aim to make respondents state their preferences as accurately as possible, are often conducted to find the valuation of environmental goods [see Freeman, 2003, for a thorough description of different SP methods]. Carson and Groves (2007) note two conditions that must be met in order to interpret answers to SP questions with economic theory. First, the respondent must believe that his or her response could potentially influence decision making. Second, the respondent must care about the outcome of the decision making.1 Such consequential questions might not be incentive compatible; i.e., the respondent might not have an incentive to tell the truth. Referring to the results independently derived by Gibbard (1973) and Satterthwaite (1975), Carson and Groves (2007) argue that the response format with just one binary choice can be incentive compatible. The contingent valuation (CV) variant dichotomous choice (DC), where each respondent is asked about one specific bid for the change (first used by Bishop and Heberlein, 1979), is such a method.

In economics, strategic behavior is just utility-maximizing behavior (Carson, Flores, and Meade, 2001). A thorough discussion about strategic behavior is found in Mitchell and Carson (1989), where a division is made between two different kinds of bias due to strategic behavior. One is an incentive to exaggerate willingness to pay (WTP) when payment is not compulsory, and the other is an incentive to state a too low WTP when payment is individual and compulsory.

As pointed out by Carson and Groves (2007), the payment vehicle used when valuing a public good must be compulsory to be incentive compatible. When answering a DC CV question using a compulsory payment vehicle, it is only when the bid differs from the expected cost and the respondent's WTP is between the bid and the expected cost that strategic behavior would result in an inaccurate response (see Ivehammar, 2006). When the payment vehicle is voluntary (made as a donation), respondents have an incentive to exaggerate their WTP (if they want the good at all) and then free-ride when payment is collected.

Apart from some payment vehicles giving incentives to answer strategically, the payment vehicle could be important for WTP per se. People's WTP may vary depending on their opinions about which payment vehicle is preferable in a specific situation or which group of people should pay, for example, because of political or moral views.

If the amount of the public good is not precisely defined, WTP should be higher with a compulsory payment vehicle than under a voluntary one (if there is no bias), and the more general the payment vehicle is, the higher WTP should be. This is because the greater the number of people paying for the public good, the greater will be the collective benefit.

The importance of the payment vehicle has been discussed since the beginning of the use of CVM. Cummings, Brookshire, and Schulze (1986) state that the choice of payment vehicle should be influenced by what payment vehicle is reasonable in a specific case, i.e., how the case in question would be financed if it were implemented. Mitchell and Carson (1989) propose realism and neutrality as two criteria for the choice of payment vehicle. …

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