Irrational Responses in Contingent Valuation and Their Potential Impacts on Mean Stated Willingness-to-pay

Abstract

The contingent valuation (CV) technique is the most frequently used method to elicit individuals’ willingness to pay (WTP) for nonmarket goods (Carlsson and Martinsson). With the use of CV to elicit the economic value of nonmarket goods gaining popularity, it is becoming increasingly important to assess the validity of the instrument. The validity assessment of the CV method determines whether contingent valuation measures the correct theoretical specification of Hicksian surplus values (Reiling, Boyle, and Philips). Studies on the validity assessment issue ca n be roughly grouped into two types, internal tests and external tests. Standard properties of consumer preferences are tested with internal tests while external tests are mostly concerned with the issue whether the hypothetical WTP differs from the actual WTP ( Carlsson and Martinsson). The validity of CV estimates as a measure of Hicksian surplus or the maximum WTP has been challenged (Hausman; Kahneman and Knetsch,1992; Kahneman et al, 1993). Special attention has been paid to such aspects as temporal effects (Bateman and Langford; Kahneman and Knetsch, 1992); the embedding of the good to be valued within a broader category (Kahneman and Knetsch, 1992); the effects of ordering of goods in the elicitation survey (Samples and Hollier; Bateman and Langford); the effects of elicit value (Fisher; Irwin et al; McFadden); effects of strategic responses ( Mitchell and Carson; Posavac); and the effects of elicitation formats (Welsh and Poe, Loomis et al). Empirical results show that all these aspects can result in variations in respondents’ stated WTP. Several recent papers addressed the issue of rationality or theoretical validity of responses in CV studies. In their efforts to test rationality in choosing treatment scenarios of rheumatology care, Ryan and Bate found that over 30% of respondents provided at least one irrational response because they did not choose the dominant options. Respondents who gave irrational responses were assumed either to have misunderstood the questions or treat the survey subject as unimportant. Ryan and San Miguel also found evidence of “economically irrational” responses in their testing for consistency in a WTP experiment. The results show that about 30% of the respondents stated they were willing to pay more for a less preferred alterative of medical treatment and thus violated the assumption of consistency. Ryan and San Miguel attributed the inconsistency of WTP responses to cost-based valuation, a choice behavior consistent with the ‘fair price’ explanation for WTP responses, where consumers tend to figure out their WTP according to the perceived cost of the goods under valuation. Those “fair play” consumers do not want to exploit others or society by paying less than what they perceive the commodity would cost. To these consumers, their “irrationality” is not without a reason because they do benefit from the consumption of the commodity and they want to pay a “fair price.” This leads to our interest in examining whether respondents would be so irrational that they are willing to pay for the provision of a commodity which they believe to be totally useless. The objective is to be accomplished by a CV study of consumer WTP for quality improvement of drinking water, using survey data.