Choosing a Functional Form for an International Benefit Transfer: Evidence from a Nine-country Valuation Experiment

Abstract

This paper investigates the performance of common approaches in international benefit transfer using data from identical and simultaneous contingent valuation studies on marine water quality in nine European countries. The environmental good is shared by the study countries, but the countries differ substantially in their income levels and other characteristics. We compare the performance of value transfers (with or without income elasticity of willingness to pay adjustments) and function transfers that include only core variables supported by economic theory. Our results point to a new source of uncertainty associated with function transfer – choosing a particular functional form. Even if only theoretically relevant explanatory variables are used, the theory offers no insights with respect to a functional relationship of the dependence (e.g., linear, log-linear, exponential, polynomial). We show that while different functional forms may offer improvements in model fit, this does not necessarily translate to improvements in transfer errors or minimum tolerance levels. In our case, the value transfer with constant (unit) income elasticity adjustment, corresponding to the log-log functional relationship between willingness to pay and income, performs the best. Including additional explanatory variables or using other functional forms worsens the quality of transfers. Overall, our study questions the rationale for using more complicated function transfers in international benefit transfers, as the relationships observed within a country or a group of countries does not necessarily translate to dependencies between countries.