Use of CV Method to Measure WTP

The contingent valuation (CV) method is a survey-based elicitation technique to estimate WTP values of a good that is not traded in a conventional market.2 _{The CV method is often referred to as a stated}

preference method, in contrast to revealed preference methods, which use actual revealed behavior of consumers in the market. Under the CV method, the WTP value of a good or service is elicited by directly asking consumers, whereas the revealed preference method estimates WTP by indirectly examining market prices for the good or service in question. The CV method directly asks consumers for their WTP for a non- marketed good under a given condition or a prescribed circumstance. To elicit consumers’ WTP values for non-marketed goods, a hypothetical market scenario should be formulated and described to the survey respondents. Thus, the elicited WTP values of a good are “contingent upon” the hypothetical market prescribed in the survey instrument.3

Despite its wide use for practical policy purposes, the CV method’s ability to reliably estimate WTP is not universally accepted. While some economists have remained skeptical about the use of direct questioning to estimate WTP, one of the early verdicts4 _{on the soundness}

of the CV method came from a group of world-renowned economists: Kenneth Arrow, Robert Solow, Roy Radner, Edward Leamer, and Howard Schumann. Their Blue-Ribbon Panel report for the National Oceanic and Atmospheric Administration (NOAA) (Arrow et al. 1993, 4610) states:

“CV studies convey useful information. We think it is fair to describe such information as reliable by standards that seem to be implicit in similar contexts, like market analysis for new and innovative products and the assessments of other damages normally allowed in court proceedings.”

2 _{These non-marketed goods and services include pollution abatement for cleaner air, preserving}

historical sites, scenic value of the natural environment, water supply, sanitation facilities, reduction of traffic jams, or new vaccines for protecting public health, among other things.

3 _{The CV method is a survey technique based on economic theory that was originally and is}

still most widely used in the area of environmental economics to estimate the public’s WTP for improvements in environmental quality (Cummings, Brookshire, and Shulze 1986; Mitchell and Carson 1989).

4 _{Mitchell and Carson (1989) also conclude that the CV method can be used to obtain valid valuation}

information on public goods, but only if the method is applied in a way that addresses the potential sources of error and bias.

The CV method has improved significantly during the last 50 years. One of the pioneers in the field of CV surveys, V. Kerry Smith (2006), argues that CV research has witnessed robust progress, enabling better understanding of consumer preferences, although careful development of survey instruments (through initial preparatory work, focus groups, cognitive interviews, and pre-tests), conscientious implementation of field work, and rigorous econometric analysis that link the data to underlying theoretical models (e.g., utility functions) remain important.

An important reason behind the reservations about the CV method is the potential divergence between responses5 _{and actual behavior.}

The emerging evidence shows that predictions from “hypothetical” CV scenarios seem to compare well with actual behavior (Cameron et al. 2002, Vossler and Kerkvliet 2003). Griffin et al. (1995) show similar predictable behavior in the case of WSS improvements. Moreover, Choe, Whittington, and Lauria (1996) show that WTP values from a stated preference model (CV method) are as robust as those from a revealed preference model (such as the travel cost method). Smith (2006) contends that the CV method will remain a significant part of efforts to assess consumer preferences for non-market (and new6_{) goods.}

Adamowicz (2004), Whitehead (2006), and Whitehead and Blomquist (2006) essentially endorse this view and maintain that CV studies remain a key tool in generating data on new or non-market goods and services for policy analysis.

The above excerpts do not mean to assert that doubts regarding the CV method among some economists have completely disappeared. Despite significant improvements in methodology, debate on the ability of the CV method to meaningfully measure WTP continues. The authors’ view on this matter relies on pragmatism, recognizing the fact that practitioners do not have the luxury of waiting to undertake policy analysis until the academic debate is over. The lack of suitable alternative methods7 _{applicable within the resource and time limitations}

of many project preparatory studies justifies the use of the CV method

5 _{CV questions ask about future actions of the respondents for hypothetical scenarios.}

6 _{“New” in the case of WSS refers to different service quality attributes such as number of hours}

of service, water quality, customer service, and perhaps service provider (private and public provision, for example). These attributes that make the service a new commodity are easily comprehensible to a CV respondent; therefore the potentially excessive hypothetical biases may not necessarily occur in CV studies conducted on WSS.

7 _{Under certain circumstances, some revealed preference methods, such as market data from water}

vending, avoided coping costs, and avoided cost of illness, may be available to assess the benefits of WSS projects.

to estimate WTP. In this context, the pragmatic approach is to use the CV method meticulously, applying the improved methodology explained here to generate reliable estimates of WTP.

Over the last two decades, the CV method has been used increasingly in developing countries for improvements in WSS services (Whittington 1988). However, applying the CV method in developing countries requires careful adaptation of the method to account for local conditions and cultural differences (Whittington 1998 and 2002b). Whittington (2002b) identifies three major problematic aspects that need to be addressed: poorly crafted CV scenarios (poor study design), poor survey implementation, and failure to undertake a variety of tests to examine the validity of responses to different CV scenarios. The rest of this chapter is largely devoted to addressing these three issues.