Effects of Policy Consequentiality and Payment Vehicle on Contingent Valuation: Structural Estimates on Preference Misrepresentation

Abstract

Respondents’ belief on policy and payment consequentiality in a stated preference survey can influence the estimation of willingness to pay (WTP). This study introduces a new approach to calibrate WTP estimates using perceived policy consequentiality that enables detailed analyses of the factors behind preference misrepresentations. We examine the effects of perceived policy consequentiality under a single-bounded referendum with a tax or a donation payment vehicle on an individual’s probability of revealing truthful preference and corresponding WTP estimates based on a proposed river restoration project in Florida. We structurally estimate individuals’ misrepresentation probabilities under different levels of perceived policy consequentiality. Our results imply that a higher perceived policy consequentiality reduces preference misrepresentation. The tax payment vehicle is generally preferred to the voluntary donation payment vehicle as the tax reduces free-riding incentives when true WTP is higher than the elicited amounts. We also find that tax has a relative advantage of reducing free-riding incentives while voluntary donation has a relative advantage of reducing the hypothetical bias. Using the predicted probability of truthful representation to calibrate WTP leads to higher levels of WTP estimates and these estimates converge under the tax and donation payment vehicles.

Keywords: Contingent Valuation, Consequentiality, Incentive Compatibility, River Restoration

JEL Classification: Q51, C35