JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. How can you measure the net benefits to society from actions that impact environmental resources? An economist's answer is to employ Hicksian consumer surplus, determining the equivalent variation in income that leaves each consumer indifferent to the action. When consumers are rational and consumer surplus can be measured reliably from market demand functions, this is a satisfactory basis for welfare calculation, subject to the customary caveats about distributional equity and consistency if compensation is not actually paid. When externalities, public goods, or informational asymmetries interfere with the determination of consumer surplus from market demand functions, one can try to set up a hypothetical market to elicit an individual's equivalent variation, or willingness-to-pay (WTP). This is called the contingent valuation method (CVM). The approach elicits stated preferences from a sample of consumers using either openended questions that ask directly for WTP, or referendum (closed-ended) questions that present a bid or a sequence of bids to the consumer, and ask for a yes or no vote on whether each bid exceeds the subject's WTP. A single referendum experiment presents only one bid; a double referendum experiment presents a second bid that is conditioned on the subject's response to the first bid, lower if the first response is no and higher if it is yes. Agricultural & Applied Economics Association and Oxford University Press An extensive literature has investigated the use of CVM to value environmental goods, and in recent years has promoted it for evaluation of goods such as endangered species and wilderness areas whose value comes primarily from existence rather than active use.' The typical CVM experiment in environmental economics asks about a single commodity, often with a fairly abbreviated or stylized description that assumes the consumer can draw upon prior knowledge. Typically, there is no training of the consumer to reduce inconsistent (e.g. In assessing CVM, there are three commonsense questions that can be asked: (a) Is the method psychometrically robust, in that results cannot be altered substantively by changes in survey format, questionnaire design, and instructions that should be inconsequential when behavior is driven by maximization of rational preferences? (b) Is the method statistically reliable, in that the distribution of WTP can be estimated with acceptable precision using practical sample sizes? Reliability is a particular issue if CV surveys produce extreme responses with some probability, perhaps due to strategic misrepresentation. (c) Is the method economically sensible, in that the individual preferences measured by CVM are consistent with the logical requirements of rationality (e.g., transitivity), and at least broadly consistent with sensible features of economic preferences (e.g., plausible budget shares and income elasticities)? CVM might fail to meet these criteria because respondents receive incomplete information on the consequences of the available choices, or are given inadequate incentives to be truthful and avoid strategic misrepresentation, or because the experimental design is not sufficiently rich to detect and compensate for systematic and random response errors. Beyond such technical problems, there could be a fundamental failure of CVM if consumers do not have stable, classical preferences for the class of commodities, so that the foundations of Hicksian welfare analysis break down. Intuitively, the further removed a class of commodities from market goods where the consumer has the experience of repeated choices and the discipline of market forces, the greater the possibility of both technical and fundamental failures. The broad sweep of evidence from market research, cognitive psychology, and experimental economics suggests that the existence value of natural resources, involving very complex commodities that are far outside consumers' market experience, will be vulnerable to these failures (McFadden 1986). The following sections discuss, in turn, a series of statistical issues in analyzing WTP data, parametric methods for estimating mean WTP, an experiment that was designed to detect and quantify technical failures of CVM, and the results from the experiment. Using referendum questions complicates matters only slightly, since votes at a sufficiently broad and closely spaced range of bid levels can be used to estimate directly the distribution of WTP, and this in turn can be used to estimate the population mean. This claim is proved in McFadden (1994), which gives practical nonparametric estimators, and describes the restrictions necessary on referendum experimental design for these estimators to have good largesample properties. In overview, the result is that with truthful referendum data there are estimators whose mean square error is inversely proportional to sample size, provided the experimental design "undersmooths" by taking a relatively large number of bid levels, with relatively small samples at each bid.2 For example, when WTP is restricted a priori to a finite interval, one could distribute the bids evenly over this interval, with one respondent at each level. The common practice in CV referendum studies of taking a relatively small number of bid levels leads to estimators whose mean square errors decline more slowly with sample size. Statistical Issues in CV Data 2 When the support of the WTP distribution is not finite, additional restrictions on tail behavior are needed to assure the existence of mean WTP and the stated rate of convergence of nonparametric estimators
