Re-examining empirical evidence on stated preferences: importance of incentive compatibility

Abstract

ABSTRACTThe stated preference (SP) methods use respondents’ stated choices made in hypothetical situations to infer their preferences for environmental and other public goods. These methods enable researchers to express the general public's preferences in monetary terms, and hence, to estimate the economic value of a change in the quantity or quality of the goods. However, a key question remains regarding SP methods’ validity: do the value estimates obtained from an SP study reflect respondents’ true preferences? Numerous empirical investigations have tested SP methods’ validity, but overall conclusions are mixed. We critically re-evaluate this evidence considering the issue of the necessary conditions for incentive compatibility of SP surveys. Our analysis shows that once theory-based conditions for incentive compatibility are taken into account, the available studies consistently show that the SP methods provide valid estimates of actual preferences. As a result, we argue that SP surveys must be made incentive compatible in order to observe consumers’ true preferences.