Handbook of Environmental Economics

Chapter 19

EXPERIMENTAL METHODS AND VALUATION

JASON F. SHOGREN

University of Wyoming

Contents

Abstract 970

Keywords 970

1. Introduction 971

2. The experimental method and mindset 972

3. Methods to establish rational valuation 980

3.1. The divergence between WTP and WTA 981

3.2. Preference reversals 985

3.3. Synopsis on rational valuation 991

4. Methods to measure values 993

4.1. Experiments valuing public goods 994

4.2. Experiments valuing private risks 997

4.2.1. Does the unique lab environment inflate values? 998

4.2.2. How do posted prices affect bidding behavior? 999

4.2.3. How does external information affect bidding behavior? 999

4.2.4. How do lab choices compare to retail market behavior? 1001

4.2.5. Does the risk reduction mechanism matter? 1002

4.3. Synopsis on direct valuation 1003

5. Methods to testbed surveys 1005

5.1. Hypothetical bias I: does it exist? 1005

5.2. Hypothetical bias II: calibration 1007

5.3. Framing effects I: surrogate bidding (scope/embedding) 1010

5.4. Framing II: incentive compatibility 1013

5.5. Synopsis on testbedding 1016

6. Concluding remarks 1018

Acknowledgements 1020

References 1020

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)02019-X

970 J.F. Shogren

Abstract

This chapter explores how economists use experimental methods to understand bet-

ter the behavioral underpinnings of environmental valuation. Economic experiments,

in the lab or field, are an attractive tool to address intricate incentive and contextual

questions that arise in assessing values through direct statements of preferences. By

combining empirical observation with theoretical insight, researchers use the experi-

mental method and mindset to help explain how economic and social contexts matter to

valuation. Herein we consider three themes in applying the experimental method to val-

uation – rational choice theory and stated values, direct value elicitation in the field and

lab, and “testbedding” survey designs prior to field application. First, experimental tests

of rational valuation are discussed. This lab work examines whether respondents make

choices and state values in a manner consistent with standard rational choice theory.

The circumstances of rational valuation are illustrated by the malleability of two clas-

sic anomalies – the WTP–WTA divergence and the preference reversal phenomenon.

Second, direct experimental methods to measure actual values for public and private

goods are examined. These experiments ask people to buy and sell actual goods to elicit

real values, in which researchers test how alternative exchange institutions affect these

values. Third, we survey testbed experiments designed to identify potential incentive

problems caused by hypothetical valuation questions. Four topics are discussed: test-

ing for hypothetical bias, calibrating real and hypothetical values, examining surrogate

values (or scoping) for specific environmental preferences, and evaluating the incentive

(in)compatibility of alternative elicitation mechanisms.

Keywords

valuation, experiments, auctions, mechanism design, calibration

JEL classification: B4, C9, H4, Q2