There is something about contingent valuation as a methodology that seems to generate seemingly endless debates in the research literature (see here and here, for example). The contingent valuation method is a type of non-market valuation - a way of valuing goods (and services) that are not (and cannot be) traded in markets. For example, it can be used to value environmental goods (e.g. how much is improved water quality in a stream worth?) or more general public goods (e.g. how much is another bridge across the Waikato River worth?). Essentially, contingent valuation involves presenting research participants with a series of hypothetical choices in order to determine how much they would be willing to pay for the good or service (it is what we refer to as a stated preference method). For instance, you might use a survey that asks whether people would be willing to pay an additional $5 in council property taxes to improve water quality in a particular stream (or $10, or $50, or $500), and then use that data to work out how much (on average) people are willing to pay for improved water quality.
One of the challenges in contingent valuation is whether the payment is expressed as a single one-off payment (e.g. pay $100 once and the water quality will improve) or as a series of regular (e.g. annual) payments (e.g. pay $25 per year and the water quality will improve). The latest debate I read recently addresses this important question.
First, this 2015 article by Kevin Egan (University of Toledo), Jay Corrigan (Kenyon College), and Daryl Dwyer (University of Toledo), published in the Journal of Environmental Economics and Management (sorry, I don't see an ungated version online). Egan et al. argue that there are three reasons that annual payments should be preferred rather than one-off payments, for three reasons:
First, survey respondents are spared from performing complicated present value calculations. When respondents compare their known annual WTP... to a proposed annual payment, discount rates cancel out in their benefit-cost analysis. When asked to make a one-time payment for a long-lasting environmental improvement, respondents must know their personal discount rate and perform the relevant present value calculation, while having complete fungibility of their income across time and no binding budget or liquidity constraints... Second, we conduct a convergent validity test by comparing CV estimates from surveys with one-time and ongoing annual payments to annual consumer surplus estimates from a travel cost analysis. We demonstrate that CV estimates from surveys with ongoing annual payments better match annual travel cost consumer surplus estimates. Third, a behavioral argument based on mental accounting... suggests that survey respondents who mentally set aside a fixed annual dollar amount for charitable giving will feel more constrained by a large one-time payment compared to a relatively small annual payment.
In other words, annual payments work better because they are easier for respondents to interpret, they are more consistent with revealed preference results based on actual behaviour, and they are consistent with a mental accounting story that notes that a one-off payment has an outsize effect on people's reported willingness-to-pay (WTP), compared with smaller annual payments. They go on to support their results with data from a contingent valuation survey of 967 people, investigating their willingness to pay for water quality improvements at Maumee Bay State Park in Ohio.
Enter the second article, by John Whitehead (Appalachian State University), also published in the Journal of Environmental Economics and Management, but in 2018 (ungated earlier version here). Whitehead attacks the original article on the basis of the convergent validity tests. Specifically, looking at the proportion of survey respondents who were willing to pay at different price levels, he notes that as the price increases a smaller proportion should be willing to pay that amount (because demand curves are downward sloping), but that isn't always the case. Although Egan et al. employ a method that allows them to deal with this issue (by merging parts of the sample where the downward sloping demand curve assumption would be violated), Whitehead shows that an alternative method demonstrates that both one-time payments and annual payments have convergent validity, and he concludes that there is no reason therefore to prefer annual payments.
In the third article, published in the same issue of the Journal of Environmental Economics and Management (ungated earlier version here), Egan et al. respond. They extend their earlier analysis and demonstrate convergent validity using different estimators and a variety of sensitivity analyses. However, in order to demonstrate this validity, they first merge data on two different types of annual payments: a perpetual payment (one that would go on forever) and an annual payment for a fixed period of ten years.
Finally, Whitehead follows up with a further re-analysis in this article, published in Econ Journal Watch (in 2017, weirdly before the previous two articles appeared officially in print - I guess JEEM had had enough of the debate and declined to publish this rejoinder). He concludes that:
Whenever bids are pooled using dichotomous choice data, the researcher implicitly acknowledges that something went wrong with the execution of the study or with the contingent valuation method itself. It might be that (a) bid subsamples are too low to generate enough power to conduct the statistical test, (b) bids are poorly designed (too close together, too far apart, or there is inadequate coverage of the range of WTP), or (c) contingent valuation method respondents are highly inconsistent... Data cleaning and pooling bids should not be considered a valid research method when the research goal is conducting validity tests over payment schedules or any other issue in the contingent valuation method.
Whitehead's criticism is quite valid. Manipulation of data to enable an analysis may be fine when a lower-bound (or upper-bound) estimate is all that is required. When we are testing the validity of a particular method, the standard of proof is somewhat higher. However, along the way the debate lost sight of two things. First, Egan et al. merged two different annual payment types in their broader analysis. They had earlier demonstrated in the convergent validity tests that perpetual annual payments resulted in similar WTP estimates as the travel cost method. To me, they really showed that perpetual payments should be preferred over a fixed number of annual payments, and over one-off payments. When they merged the two annual payment types together, that nuance was lost. Second, convergent validity was only one of the three reasons that Egan et al. originally proposed for why annual payments should be preferred. The debate focused on only one of the reasons, but the other two remain valid.
Overall, my takeaway is that more follow-up research is definitely required on the convergent validity question, but in the meantime it is likely that we should prefer perpetual annual payments in contingent valuation surveys. Whitehead argues that we should use both a one-time payment and annual payments. Given the potential for survey respondent fatigue and confusion, I wouldn't favour that approach. Contingent valuation solves a real problem - valuing environmental and other goods that are not traded in markets. However, we need to recognise that, like any method, it has its limitations.
Read more:
- Nothing good happens after midnight when using the CVM
- The ongoing contingent valuation debate
- More contingent valuation debates
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