Revealing Preferences for Reductions of Public Risks: An Application of the CV Approach

Abstract

In this paper the contingent valuation method (CVM) is applied to public risk reduction. Theory suggests that the size of the stated willingness to pay (WTP) for risk reduction depends on private activities aimed at reducing the risk level for the individual. The empirical results suggest that considering private averting activities increases the explanatory power of the estimated WTP function significantly. Thus, WTP passes the scope test which proposes that larger reductions from a larger baseline risk should be valued higher than lower risk reductions from a lower baseline risk. Furthermore, we demonstrate that the follow-up response format induces anchoring effects.