Thursday, 13 August 2015

Nothing good happens after midnight when using the CVM

Some goods and services that have value to people are not traded in markets (e.g. clean air) or are not traded because they don't exist yet (e.g. vaccines for HIV). These goods and services have value (we like clean air, and we want more of it), but direct estimates of the value cannot be made. However, if we want to evaluate the costs and benefits of different project alternatives, or if we want to evaluate the demand for products that don't exist yet, we need to get some sense of these values.

Economists often use non-market valuation techniques to derive estimates of value for goods and services that are not actively traded in markets. One non-market valuation technique that we discuss in ECON110 is the contingent valuation method (CVM) - a survey-based stated preference approach. We call it stated preference because we essentially ask people the maximum amount they would be willing to pay for the good or service (so they state their preference), or the minimum amount they would be willing to accept in exchange for foregoing the good or service. This differs from a revealed preference approach, where you look at the actual behaviour of people to derive their implied willingness-to-pay or willingness-to-accept.

I've used the CVM in a number of past studies, including this one on landmine clearance in Thailand (ungated earlier version here), this one on landmines in Cambodia (ungated earlier version here), and a still incomplete paper on estimating demand for a hypothetical HIV vaccine in China (which I presented as a poster at this conference). And I have a current PhD student who may use the CVM in evaluating the intensity of preferences for institutional quality by return migrants to Vietnam.

While the CVM is attractive because it is fairly intuitive and easy to use, we know that there are a number of issues with it. Not the least is that people just aren't very good at estimating what they are willing to pay (or accept) for hypothetical goods or services, or in hypothetical scenarios. And people can be quite inconsistent in their responses (which violates the common economic assumption of static preferences, which you may or may not adhere to). Either way, that leads to very noisy measures of value.

A recent paper by David Dickinson and John Whitehead (Appalachian State University) demonstrates the challenge of obtaining 'good' estimates of value quite clearly (sorry I don't see an ungated version anywhere). They use data from an online survey of Appalachian State students, who were asked whether they would vote for a student-funded group to purchase, install, and operate a wind turbine as part of a Renewable Energy Initiative. If the wind turbine was purchased, students would face a fee of $X. The student fee ($X) varied between $4 and $56 in the survey, and students could vote "For" or "Against". The key element of the study though, was that the students were randomised to complete the survey at different times of the day or night. Now, the time of day (or night) that you complete a survey shouldn't in theory affect how you feel about renewable energy, or how much you would be willing to contribute to this initiative. But it turns out it does matter:
During morning, afternoon, and evening time blocks, students vote rationally with "for" votes declining as the student fee rises... During the night time, students are completely insensitive to the student fee, at least in the standard way of thinking; the student fee has no statistically significant effect on "yes" votes.
In other words, the students demonstrated a downward-sloping demand curve during the morning, afternoon, and evening, but price didn't seem to matter at night (between Midnight and 6am). The lack of price sensitivity at night leads the authors to conclude that "Nothing good happens after midnight when using the CVM". I would add that it suggests we should all avoid watching the Shopping Channel late at night.

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