Hypothetical bias, choice experiments and willingness to pay

Abstract

There is growing interest in establishing the extent of differences in willingness to pay (WTP) for attributes, such as travel time savings, that are derived from real market settings and hypothetical (to varying degrees) settings. Non-experiment external validity tests involving observation of choice activity in a natural environment, where the individuals do not know they are in an experiment, are rare. In contrast the majority of tests are a test of external validity between hypothetical and actual experiments. Deviation from real market evidence is referred to in the literature broadly as hypothetical bias. The challenge is to identify such bias, and to the extent to which it exists, establishing possible ways to minimise it. This paper reviews the efforts to date to identify and 'calibrate' WTP derived from one or more methods that involve assessment of hypothetical settings, be they (i) contingent valuation methods, (ii) choice experiments involving trading attributes between multiple alternatives, with or without referencing, or (iii) methods involving salient or non-salient incentives linked to actual behaviour. Despite progress in identifying possible contributions to differences in marginal WTP, there is no solid evidence, although plenty of speculation, to explain the differences between all manner of hypothetical experiments and non-experimental evidence. The absence of non-experimental evidence from natural field experiments remains a major barrier to confirmation of under or over-estimation. We find, however, that the role of referencing of an experiment relative to a real experience (including evidence from revealed preference (RP) studies), in the design of choice experiments, appears to offer promise in the derivation of estimates of WTP that have a meaningful link to real market activity, closing the gap between RP and SC WTP outputs.Hypothetical bias Willingness to pay Choice experiments Contingent valuation Contextual bias Referencing Revealed behaviour

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This paper was published in Research Papers in Economics.

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