Contingent Valuation

Contingent valuation is a method for estimating the value of benefits that do not have an established monetary value. It utilizes surveys that ask people how much they would be willing to pay for specific benefits. It is called "contingent" valuation, because people are asked to state their willingness to pay, contingent on a specific hypothetical benefit.

Examples

  • Value of traveler information: Survey travelers to determine what they would be willing to pay for a specific, but not yet available, type of information.
  • Value of highway landscaping: Survey travelers to determine what they would be willing to pay for highway landscaping, or how they value it relative to other trip characteristics with established values, such as travel time.
  • Value of a wilderness area: Survey constituents to determine what they are willing to pay to have this wilderness area even if they may never use it. This is sometimes referred to as the "existence value."

Uses of Contingent Valuation

Contingent valuation is especially useful for valuing:

  • Benefits that cannot be bought and sold, such as scenic views
  • Things that people may never use, such as wilderness areas (often referred to as existence value)
  • Things that benefit others, such as highway overpasses to preserve wildlife habitat
  • Services or products that do not yet exist

Key Issues

Contingent valuation is based on what people say they would do (stated preference), as opposed to what people are observed to do (revealed preference). What people say something is worth to them may not be the same as what they would actually be willing to pay for it. Therefore, contingent valuation is not an appropriate method if the value can be estimated based on outside, quantifiable factors.

Unless the contingent valuation survey is carefully designed and executed, the results may be significantly biased. The survey must be designed to provide value estimates that are either representative of the people to whom the benefit will accrue, or in the case of products that don't exist yet or that would benefit an absent group, are pertinent to the situation. Also, the benefit should be presented so that respondents understand exactly what they would entail.

Designing and analyzing a contingent valuation survey requires specialized skills, and the execution of the survey can be expensive. Therefore, a contingent valuation study is only justified when the benefits that it is intended to measure are expected to be important or are common benefits that would be similarly valued across many sites thus allowing for value transfer.

Contingent Valuation Method

Step 1

The first step is to define the valuation problem. This would include determining exactly what benefits are being valued, and who the relevant population is. In the case of traveler information, the nature of the information, its accuracy, frequency of updating, method of dissemination, and cost to user would be among the relevant characteristics of the benefits. In the cases of a scenic view or highway landscaping, the benefits should be shown visually. In the case of a highway overpass to maintain mobility for wildlife, the relevant information would be the size of the wildlife population that would be affected, perhaps in relation to the overall population of the affected species, the ranges of the wildlife in relation to the areas available on both sides of the highway, and perhaps the effectiveness of such overpasses in maintaining wildlife populations in other areas.

The relevant populations in the case of traveler information would be those people who could avail themselves of the information. Similarly the relevant population for the scenic views and landscaping would be travelers on the roads where these were located. The relevant population for wildlife overpasses would be the people who would pay for the overpasses.

Step 2

The second step is to make preliminary decisions about the survey itself, including whether it will be conducted by mail, phone, internet, in person, or in groups; how large the sample size will be, who will be surveyed, and other related questions. The answers will depend, among other things, on the importance of the valuation issue, the complexity of the question being asked, and the size of the budget available to do the contingent valuation study.

In-person interviews are generally the most effective for complex questions, because it is often easier to explain the required background information to respondents in person, and people are more likely to complete a long survey when they are interviewed in person. In some cases, visual aids such as videos or color photographs may be presented to help respondents understand the conditions of the scenario that they are being asked to value.

In-person interviews are generally the most expensive type of survey. However, mail surveys that follow procedures that aim to obtain high response rates can also be quite expensive. Mail and telephone surveys must be kept fairly short, or response rates are likely to drop dramatically and be less representative of the population. Telephone surveys may be less expensive, but it is often difficult to ask contingent valuation questions over the telephone, because of the amount of background information required.

Step 3

The next step is the actual survey design. This is the most important and difficult part of the process. It is accomplished in several steps. It usually starts with initial interviews or focus groups with the types of people who will be receiving the final survey. The survey designers would ask these people general questions, including ones that dealt with peoples' understanding of the issues related to the benefit. In later focus groups, the questions would get more detailed and specific, to help develop specific questions for the survey, as well as decide what kind of background information is needed and how to present it. Then the survey would be pre-tested to determine if people understand the hypothetical benefits and if the survey questions elicit clear, reasonable answers.

Step 4

Next is the sample design. The sample can be randomly selected from the relevant population, using standard statistical sampling methods. It may be preferable to use a stratified sample if different sub-populations are expected to respond differently or to have a different response rate. Because the purpose of the survey is to estimate some mean or median value, the required sample size will depend upon the variation in valuations by respondents. The pre-test results can be used to estimate this variation, which can then be used to determine the sample size needed for the desired confidence interval.

Step 5

The final step is to compile, analyze and report the results. The data must be analyzed using statistical techniques appropriate for the type of question. Non-response bias can be dealt with in a number of ways. The most conservative way is to assume that those who did not respond have zero value for the hypothetical benefit. The average value for the survey respondents can be calculated and applied to the total relevant population to obtain a value for the total benefit.

Survey Questions

Open-Ended

Questions can be asked in a variety of ways, using both open-ended and closed-ended formats. In the open-ended format, respondents are asked to state their maximum willingness to pay for the environmental improvement.

Closed-Ended

With the closed-ended format, also referred to as discrete choice, respondents are asked whether or not they would be willing to pay a particular amount for the benefit or whether they would vote yes or no for a specific policy at a given cost. The respondent's choice is simpler than with an open-ended question, making it easier to respond. One or two follow-up questions can be added to elicit additional information about what the respondent would be willing to pay.

Contingent Choice

The respondents can also be offered a number of benefit alternatives, to reveal how they make tradeoffs between different types of benefits. The statistical analysis for choice surveys is often more complicated than that for simple contingent valuation, requiring the use of discrete choice analysis methods to infer willingness to pay from the tradeoffs made by respondents.

Bidding

Respondents are asked to bid for the benefit in an auction. The theory is that the bidding process helps capture the full consumer surplus through increasing the prices people are willing to pay, and the multiple rounds allow greater consideration by the consumer. A problem with this method is bias related to the starting bid; starting points have been found to influence the final valuation, with a higher valuation resulting from a higher starting point.

Payment Card Method

Respondents are given a card with a number of values. They are asked "What amount on this card is the most that you would be willing to pay [for the level of benefit being proposed]?"

Validity

Two factors have the strongest influence on the validity of contingent valuation. The first is the extent to which the sample represents the people to whom the benefits would accrue or the people whose judgment is most relevant to the situation. The second is the extent to which respondents understand the context in which the benefit will be experienced, the nature and extent of the benefit, who and what will be affected, and how the benefit will be paid for. It is important that the context of the benefit not be confused with the benefit itself. If people know they will not actually have to pay for a benefit, they may have an incentive to overstate what they are willing to pay for something they value.

 

Sources

Bjornstad, D. J. and J. R. Kahn. "Characteristics of Environmental Resources and Their Relevance for Measuring Value." The Contingent Valuation of Environmental Resources. Brookfield, Vermont: Impact Assessment. New York: John Wiley & Sons, Inc., 1995,. pp.117.

Desvouges, et. al. "Measuring Natural Resource Damages with Contingent Valuation: Tests of Validity and Reliability." Contingent Valuation: A Critical Assessment. Amsterdam: Elsevier Science Publishers, 1993.

Diamond, P.A. and J.A. Hausman. "Contingent Valuation: Is Some Number Better than No Number." Journal of Economic Perspectives. vol. 8, no. 4, Fall.

Diamond, P. and J. Hausman. "CV Measurement of Nonuse Values." Contingent Valuation: A Critical Assessment. New York: Elsevier Publications, Inc., 1993.

Fisher, A. C. "The Conceptual Underpinnings of the CV Method." The Contingent Valuation of Environmental Resources. p. 22.

King, D.M. and M. Mazzotta. Ecosystem Evaluation (website). Available at: http://www.ecosystemvaluation.org/contingent_valuation.htm.

McFadden, D. and G. K. Leonard. "Methodologies for Data Collection and Analysis." Contingent Valuation: A Critical Assessment. New York: Elsevier Publications, Inc., 1993.

Navrud, S. "Willingness to Pay for Preservation of Species - An Experiment with Actual Payments." In S. Navrud (ed.) Pricing the European Environment. New York: Oxford University Press, 1992.

Mitchell, R. C. and R. T. Carson. Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington: Resources for the Future, 1988.

Nunes, P., and J. van den Bergh. "Economic Valuation of Biodiversity: Sense or Nonsense." Journal of Ecological Economics. vol. 39, 2001, pp. 203-222.

Pommerehne, W. W. and A. Hart. "Limits to the applicability of the contingent valuation approach?" Determining the Value of Non-Market Goods. ed. Raymond J. Kopp et. al. 1997.

Roberts, K. J., M. E. Thompson, and P. W. Pawlyk. "Contingent Valuation of Recreational Diving at Petroleum Rigs, Gulf of Mexico." Transactions of the American Fisheries Society. Vol.4, pp. 163-185.

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