Handbook of Environmental Economics

Chapter 17

CONTINGENT VALUATION

RICHARD T. CARSON

University of California, San Diego, USA

W. MICHAEL HANEMANN

University of California, Berkeley, USA

Contents

Abstract 822

Keywords 823

1. Introduction 824

2. History of contingent valuation 827

2.1. Antecedents and beginnings 827

2.2. Early empirical development 829

2.3. Health, transportation, and the allocation of public budgets 833

2.4. The existence value revolution 835

2.5. Developments from the mid-1970s through the late 1980s 837

2.6. The Mitchell and Carson book 839

2.7. Exxon Valdez 840

2.8. Literature production 841

2.9. Major issues 843

3. Economic theory of contingent valuation 844

3.1. Economic welfare measures 844

3.2. From WTP to CV response 847

3.3. Statistical model of CV responses 851

3.4. Summary measures of welfare 857

4. Types of value/motives for valuation 862

4.1. Existence value 862

4.2. Combining CV and RP data to measure use versus nonuse value 865

4.3. Contingent behavior 866

4.4. Bequest value 867

4.5. Option value 867

5. Elicitation formats for stated preference information 869

5.1. Response probability models for alternative elicitation formats 873

Handbook of Environmental Economics, Volume 2. Edited by K.-G. Mäler and J.R. Vincent

© 2005 Elsevier B.V. All rights reserved

DOI: 10.1016/S1574-0099(05)02017-6

822 R.T. Carson and W.M. Hanemann

5.2. The issue of incentive compatibility

875

5.3. Some general results on incentives 876

5.4. A typology of the incentive structure of elicitation formats 881

5.5. Promoting incentive compatibility 883

6. Econometric issues 884

6.1. Structure of WTP distributions 884

6.2. Issues in fitting binary discrete choice models 887

6.3. Bid design 889

6.4. Treatment of don’t knows and protest zeros 890

6.5. Treatment of respondent uncertainty 891

6.6. Continuous response CV data 893

6.7. Choice experiments 894

6.8. Models with covariates 897

7. Survey design 897

8. Survey administration 901

8.1. Defining the population of interest 901

8.2. Survey mode 902

8.3. Sampling approaches 903

8.4. Nonresponse 904

8.5. Sample size 905

9. Consistency of CV results with theoretical prediction 906

9.1. Neoclassical theory and contingent valuation 906

9.2. WTP versus WTA 907

9.3. Income elasticity of WTP 908

9.4. Sequencing, nesting, scope insensitivity and the adding-up test 910

10. Consistency of CV results with actual behavior 914

11. Concluding remarks 918

References 920

Abstract

Value estimates for environmental goods can be obtained by either estimating prefer-

ence parameters as “revealed” through behavior related to some aspect of the amenity

or using “stated” information concerning preferences for the good. In the environmental

economics literature the stated preference approach has come to be known as “contin-

gent valuation” as the “valuation” estimated obtained from preference information given

the respondent is said to be “contingent” on the details of the “constructed market” for

the environmental good put forth in the survey.

Work on contingent valuation now typically comprises the largest single group of

papers at major environmental economics conferences and in several of the leading

journals in the field. As such, it is impossible to “review” the literature per se or even

cover all of the major papers in the area in some detail. Instead, in this chapter we seek

to provide a coherent overview of the main issues and how they fit together.

Ch. 17: Contingent Valuation 823

The organization of the chapter is as follows. First, we provide an overview of the his-

tory of contingent valuation starting with its antecedents and foundational papers and

then trace its subsequent development using several broad themes. Second, we put forth

the theoretical foundations of contingent valuation with particular emphasis on ties to

standard measures of economic welfare. Third, we look at the issue of existence/passive

use considerations. Fourth, we consider the relationship of contingent valuation to in-

formation on preferences that can be obtained by observing revealed behavior and how

the two sources of information might be combined. Fifth, we look at different ways

in which preference information can be elicited in a CV survey, paying particular at-

tention to the incentive structure posed by different elicitation formats. Sixth, we turn

to econometric issues associated with these different elicitation formats. Seventh, we

briefly consider survey design issues. Eighth, we look at issues related to survey ad-

ministration and extrapolating the results obtained to the population of interest. Ninth,

we describe the major controversies related to the use of contingent valuation and sum-

marize the evidence. Finally, we provide some thoughts on where we think contingent

valuation is headed in the future.

Keywords

contingent valuation, nonmarket valuation, consumer decision making, public goods,

environmental economics

JEL classification: Q510, D610, D120, H400