Non-market Valuation and Damage Assessment

Benefit-cost analysis remains the main decision tool for policy makers around the globe. Work here focuses on improving – both theoretically and empirically – that approach. These advances, in turn, instruct policy makers on how to more accurately value ecosystem damages, such as the Exxon Valdez oil spill or BP’s oil leak.

How Can Behavioral Economics Inform Non-Market Valuation? An Example from the Preference Reversal Literature

Alevy, Jonathan, John A. List, and Vic Adamowicz

Land Economics, (2011), 87 (3), pp. 365-381

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Psychological insights have made inroads within most major areas of study in economics. One area where less advance has been made is environmental and resource economics. In this study, we examine the implications of preference reversals over evaluation modes, in which stated economic values critically depend on whether the good is valued jointly with others or in isolation. The question arises because two commonly used methods for eliciting stated preferences differ in that one presents objects together and another presents objects to be evaluated in isolation. Beyond showing an example of the import of behavioral economics, our empirical evidence sheds new light on the factors associated with insensitivity of valuations to the scope of the good.

Rebate Rules in Threshold Public Good Provision

Spencer, Michael A., Stephen K. Swallow, Jason F. Shogren, and John A. List

Journal of Public Economics, (2009), 93(5-6), pp. 798-806.

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This paper considers how six alternative rebate rules affect voluntary contributions in a threshold public- good experiment. The rules differ by (1) whether an individual can receive a proportional rebate of excess contributions, a winner-takes-all of any excess contributions, or a full rebate of one’s contribution in the event the public good is provided and excess contributions exist, and (2) whether the probability of receiving a rebate is proportional to an individual’s contribution relative to total contributions or is a simple uniform probability distribution set by the number of contributors. The paper adds to the existing experimental economics literature on threshold public goods by investigating both aggregate and individual demand revelation under the winner-take-all and random full-rebate rules. Half of the rules (proportional rebate, winner-take-all with uniform probability among all group members, and random full-rebate with uniform probability) provide total contributions that nearly equal total benefits, while the rest (winner-take-all with proportional probability, winner-take-all with uniform probability among contributors only, and random full- rebate with proportional probability) exceed benefits by over 30%. Only the proportional rebate rule is found to achieve both aggregate and individual demand revelation. Our experimental results have implications for both fundraisers and valuation practitioners.

Is Hypothetical Bias a Universal Phenomenon? A Multinational Investigation

Ehmke, Mariah D., Jayson L. Lusk, and John A. List

Land Economics, (2008), 84 (3), pp. 489–500.

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A concern with the contingent valuation method (CVM) is the finding that hypothetical and real statements of value often differ. We test whether hypothetical bias, broadly defined, is independent of location by comparing real and hypothetical votes on a dichotomous choice referendum in China, France, Indiana, Kansas, and Niger. We find significant differences in hypothetical bias across locations and reject the hypothesis that hypothetical bias is independent of location. As opposed to the typical finding reported in the literature, subjects in Niger significantly understated their willingness-to-pay in the hypothetical referendum.

Using Ex Ante Approaches to Obtain Credible Signals for Value in Contingent Markets: Evidence from the Field

Landry, Craig E. and John A. List

American Journal of Agricultural Economics, (2007), 89(2), pp. 420-429.

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While contingent valuation remains the only option available for measurement of total economic value of non marketed goods, the method has been criticized due to its hypothetical nature. We analyze field experimental data to evaluate two ex ante approaches to attenuating hypothetical bias, directly comparing value statements across four distinct referenda: hypothetical, ‘cheap talk,’ ‘consequential,’ and real. Our empirical evidence suggests two major findings: hypothetical responses are significantly different from real responses; and responses in the consequential and cheap talk treatments are statistically indistinguishable from real responses. We review the potential for each method to produce reliable results in the field.

A Test of Diminishing Marginal Value

Horowitz, John, John A. List, and Kenneth E. McConnell

Economica, (2007), 74(296), pp. 650-663.

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The notion of diminishing marginal value had a profound impact on the development of neoclassical theory. Early neoclassical scholars had difficulty convincing contemporaries of the new paradigm’s value until political economists used the critical assumption of diminishing marginal value to link utility and demand. While diminishing marginal value remains a key component of modern economic intuition, there is little direct verification of this behavioural property. This paper reports experiments on a myriad of subject pools to examine behaviour in both price and exchange settings. We report results from nearly 900 subjects across 19 treatments and find strong evidence of diminishing marginal value.

Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace

Karlan, Dean and John A. List

American Economic Review, (2007), 97(5), pp. 1774-1793

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Several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level. These results, which clearly contradict closely held economic doctrines, have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory-e.g., prospect theory, which invokes psychological effects. This paper pits neo-classical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well-functioning marketplace. The pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers, but consumers with intense market experience behave largely in accordance with neoclassical predictions. Moreover, the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered. This ‘transference of behavior’ across domains has important implications in both a positive and normative sense.

Using Choice Experiments to Value Non-Market Goods and Services: Evidence from Field Experiments

List, John A., Paramita Sinha, and Michael H. Taylor

The B.E. Journal of Economic Analysis & Policy, (2006), 6(2 – Advances), Article 2.

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Critics of stated preference methods argue that hypothetical bias precludes survey techniques from providing reliable economic values for non-market goods and services, rendering estimation of the total economic benefits of public programs fruitless. This paper explores a relatively new methodology to obtain the total value of non-market goods and services—choice experiments— which conveniently provide information on the purchase decision as well as the characteristic value vector. The empirical work revolves around examining behavior in two very different field settings. In the first field study, we explore hypothetical bias in the purchase decision by eliciting contributions for a threshold public good in an actual capital campaign. To extend the analysis a level deeper, in a second field experiment we examine both the purchase decision and the marginal value vector via inspection of consumption decisions in an actual marketplace. In support of the new valuation design, both field experiments provide some evidence that hypothetical choice experiments combined with ‘cheap talk’ can yield credible estimates of the purchase decision. Furthermore, we find no evidence of hypothetical bias when estimating marginal attribute values. Yet, we do find that the ‘cheap talk’ component might induce internal inconsistency of subjects’ preferences in the choice experiment.

Using Hicksian Surplus Measures to Examine Consistency of Individual Preferences: Evidence from a Field Experiment

List, John A.

Scandinavian Journal of Economics, (2006), 108(1), pp. 115-134.

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This paper pits neoclassical theory against prospect theory by investigating several clean tests of the competing hypotheses. Consistent with previous work, the field experimental data suggest that prospect theory adequately organizes behavior among inexperienced consumers, whereas consumers with intense market experience behave largely in accordance with neo-classical predictions. The data indicate that the convergence in values occurs entirely because of lower Hicksian equivalent surplus values.

Scientific Numerology, Preference Anomalies, and Environmental Policymaking

List, John A.

Environmental and Resource Economics, (2005), 32(1), pp. 35-53.

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Recently an abundance of experimental evidence has been gathered that is consonant with the notion that individual preferences are inconsistent and unstable. These empirical results potentially undermine the theoretical foundation of welfare economics, as the degree of preference liability claimed suggests that perhaps no optimization principles underlie even the most straightforward of choices. Yet policymakers in the environmental arena continue to prescribe policies based on economics-based methods that are constructed on the very principles that have been directly refuted. Are policymakers creatures of habit that move at glacial speed or is there something deeper behind their inertness? In this study, I explore this issue within the U.S. context and argue that there is some rationality behind current public policy decision making. I then explore whether the empirical evidence supports the view that policymakers should take preference anomalies seriously. As a case study, I focus on some of my recent findings on preference inconsistencies in the marketplace.

The effect of varying the causes of environmental problems on stated WTP values: evidence from a field study

Bulte, Erwin, Shelby Gerking, John A. List, and Aart de Zeeuw

Journal of Environmental Economics and Management, (2005), 49(2), pp. 330-342.

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Standard applications of utility theory assume that utility depends solely on outcomes and not on causes. This study uses a field experiment conducted in the Netherlands to determine if alternative causes of an environmental problem affect willingness to pay to ameliorate it. We find evidence supporting the hypothesis that people are willing to pay significantly more to correct problems caused by humans than by nature (the ‘outrage effect’), but find no support for the hypothesis that ‘moral responsibility’ matters. We also find support for the hypothesis that stated willingness to pay values obtained via ‘cheap talk’ and ‘consequential’ treatments are lower than without inclusion of these protocols.

Examining the Role of Social Isolation on Stated Preferences

List, John A., Robert P. Berrens, Alok K. Bohara, and Joe Kerkvliet

American Economic Review, (2004), 94(3), pp. 741- 752.

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Valuation on the Frontier: Calibrating Actual and Hypothetical Statements of Value

Hofler, Richard A., and John A. List

American Journal of Agricultural Economics, (2004), 86(1), pp. 213-221.

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The lack of robust evidence showing that hypothetical behavior directly maps into real actions remains a major concern for proponents of stated preference nonmarket valuation techniques. This article explores a new statistical approach to link actual and hypothetical statements. Using willingness-to- pay field data on individual bids from sealed-bid auctions for a $350 baseball card, our results are quite promising. Estimating a stochastic frontier regression model that makes use of data that any contingent valuation survey would obtain, we derive a bid function that is not statistically different from the bid function obtained from subjects in an actual auction. If other data can be calibrated similarly, this method holds significant promise since an appropriate calibration scheme, ex ante or ex post, can be invaluable to the policy maker that desires more accurate estimates of use and nonuse values for nonmarket goods and services.

Do causes of environmental problems affect Hicksian equivalent surplus? Evidence from the field

Bulte, Erwin H., Shelby Gerking, John A. List, and Aart de Zeeuw

Economics Letters, (2004), 85(2), pp. 157-162.

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Measuring preferences via stated methods remains the only technique to obtain the total economic value of a non-marketed good or service. This study examines if alternative causes of an environmental problem affect individual statements of compensation demanded. Making use of a unique sample drawn from the Netherlands, we find that Hicksian equivalent surplus (ES) is not significantly affected by causes of environmental harm. While our finding that agents only care about outcomes, rather than causes, is consonant with standard applications of utility theory, it is at odds with some recent experimental findings measuring the effects of cause on Hicksian compensating surplus (CS).

Laboratory Testbeds and Non-Market Valuation: The Case of Bidding Behavior in a Second- Price Auction with an Outside Option

Cherry, Todd, Peter Frykblom, Jason F. Shogren, John A. List, and Melonie B. Sullivan

Environmental and Resource Economics (2004), 29(3), pp. 285-294.

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Researchers now use the lab to examine the behavioral underpinnings of valuation before the field application which some argue has less experimental control. But lab valuation work raises its own set of concerns when it uses private goods to explore non-market valuation behavior because private goods have substitutes often unaccounted for in the lab. Therefore, the lab as a tool to testbed field valuation work may be limited. Herein we design an induced valuation experiment to explore bidding behavior in a second-price auction with an outside option that is a perfect substitute for the auction commodity. Theory predicts that rational bidders will consider the prices of outside options when formulating bidding strategies, and will reduce their bids whenever their resale value exceeds the price of the outside option. Our results suggest that bidders account for outside options when formulating bids with behavior following comparative static predictions. In addition, we provide evidence concerning hypothetical versus actual behavior with induced values – the data suggesting a hypothetical bias in the level of bids but not in bid shaving.

Substitutability, experience, and the value disparity: evidence from the marketplace

List, John A.

Journal of Environmental Economics and Management, (2004), 47(3), pp. 486- 509.

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Recent empirical evidence suggests that important disparities exist between willingness to pay and compensation demanded for the same good. These results, which clearly contradict closely held economic doctrines, have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory. This study examines the generality of these experimental findings by going to a well-functioning marketplace and examining more than 350 individual decisions across two incentive-compatible elicitation mechanisms. The data suggest that behavior of individuals with intense experience approaches neoclassical predictions: any observed WTA/WTP disparity amongst this group is negligible.

Does Market Experience Eliminate Market Anomalies?

List, John A.

Quarterly Journal of Economics, (2003), 118(1), pp. 41-71.

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This study examines individual behavior places to investigate whether market experience Field evidence from both markets suggests that the neoclassical prediction as market experience in two well-functioning market increases. test of whether these observations are due to treatment (market experience) or selection (e.g., static preferences), I find that market experience plays a significant role in eliminating the endowment effect. I also find that these results are robust to institutional change and extend beyond the two marketplaces studied. Overall, this study provides strong evidence that market experience eliminates an important market anomaly.

Using Random nth Price Auctions to Value Non-Market Goods and Services

List, John A.

Journal of Regulatory Economics, (2003), 23(2), pp. 193-205.

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Public policy decision making often requires balancing the benefits of a policy with the costs. While regulators in the United States and abroad rely heavily on benefit-cost analysis, critics contend that hypothetical bias precludes one of the most popular benefit estimation techniques – contingent surveys – from providing reliable economic values for nonmarket goods and services. This paper explores a new methodology to obtain the total value of nonmarket goods and services – random nth price auctions. The empirical work revolves around examining behavior of 360 participants in a competitive marketplace, where subjects naturally buy, sell, and trade commodities. The field experiment provides some preliminary evidence that hypothetical random nth price auctions can, in certain situations, reveal demand truthfully.

False Alarm over Environmental False Alarms

Pacala, Steven, Erwin Bulte, John A. List, and Simon Levin

Science, (2003), 301(5637), pp. 1187-1189.

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We live in an uncertain world, in which action and prudence must be continually juggled. Caution can be costly, but indifference to serious risks can be disastrous.

Preference Reversals of a Different Kind: The ‘More is Less’ Phenomenon

List, John A

American Economic Review, (2002), 92(5), pp. 1636-1643.

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The theory of riskless choice, as pioneered by Jeremy Bentham and James Mill, characterizes utility maximization as an individual process whereby decision makers’ preferences are consistent and stable. If preferences are labile and subject to the whims of circumstance, then no optimization principles may underlie even the most straight forward of choices.

Calibration of Willingness-to-Accept

List, John A. and Jason F. Shogren

Journal of Environmental Economics and Management, (2002), 43(2), pp. 219-233.

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This paper calibrates real and hypothetical willingness-to-accept estimates elicited for consumer goods in a multi-unit, random nth-price auction. Using a within-subject experimental design, we find that people understated their real willingness to accept in the hypothetical regimes, framed both as demand and non-demand revealing. After controlling for person-specific effects, however, hypothetical and real statements are equivalent on the margin.

A random nth-price auction

Shogren, Jason F., Michael Margolis, Cannon Koo, and John A. List

Journal of Economic Behavior and Organization, (2001), 46(4), pp. 409-421.

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Second-price auctions are designed to induce people to reveal their private preferences for a good. Laboratory evidence suggests that while these auctions do a reasonable job on aggregate, they fall short at the individual level, especially for bidders who are off-margin of the market-clearing price. Herein we introduce and explore whether a random nth-price auction can engage all bidders to bid sincerely. Our results first show that the random nth-price auction can induce sincere bidding in theory and practice. We then compare the random nth-price to the second-price auction. We find that the second-price auction works better on-margin, and the random nth-price auction works better off-margin.

What Experimental Protocol Influence Disparities Between Actual and Hypothetical Stated Values? Evidence from a Meta-Analysis

List, John A. and Craig A. Gallet

Environmental and Resource Economics, (2001), 20(3), pp. 241-254.

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Preferences elicited in hypothetical settings have recently come under scrutiny, causing estimates from the contingent valuation method to be challenged due to perceived ‘hypothetical bias.’ Given that the received literature derives value estimates using heterogeneous experimental techniques, understanding the effects of important design parameters on the magnitude of hypothetical bias is invaluable. In this paper, we address this issue statistically by using a meta-analysis to examine data from 29 experimental studies. Our empirical findings suggest that on average subjects overstate their preferences by a factor of about 3 in hypothetical settings, and that the degree of over- revelation is influenced by the distinction between willingness-to-pay and willingness-to-accept, public versus private goods, and several elicitation methods.

Auction mechanisms and the measurement of WTP and WTA

Shogren, Jason F., Sungwon Cho, Cannon Koo, John A. List, Changwon Park, Pablo Polo, and Robert Wilhelmi

Resource and Energy Economics, (2001), 23(2), pp. 97-109.

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We evaluate the impact of three auction mechanisms — the Becker–DeGroot–Marschak mechanism, the second-price auction, and the random nth-price auction — in the measurement of willingness to pay (WTP) and willingness to accept (WTA) measures of value. Our results show that initial bidding in trial 1 in each auction does not contradict the endowment effect; but that, if it is the endowment effect that governs people’s initial bidding behavior, it can be eliminated with repetitions of a second-price or random nth-price auction; and if the thesis is that the effect should persist across auctions and across trials is right, our results suggest that there is no fundamental endowment effect.

Hypothetical-actual bid calibration of a multigood auction

List, John A., Michael Margolis, and Jason F. Shogren

Economics Letters, (1998), 60(3), pp. 263-268.

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We design and implement a field experiment to elicit and calibrate in-sample hypothetical and actual bids given the presence of other goods and intensity of market experience. Using market goods that possess characteristics beyond the norm but yet remain deliverable, bidding behavior was consistent with theory. But we also observe the average calibration factor for hypothetical bids in the auction with other goods to be more severe (0.3) than for the auction without the goods (0.4). The results support the view that the calibration of hypothetical and actual bidding is good- and context-specific.

Calibration of the difference between actual and hypothetical valuations in a field experiment

List, John A. and Jason F. Shogren

Journal of Economic Behavior and Organization, (1998), 37(2), pp. 193-205.

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Evidence suggests the calibration of hypothetical and actual behavior is good-specific. We examine whether clustering commodities into mutual categories can reduce the burden. While we reject a common calibration across sets of commodities, a sport-specific calibration function cannot be rejected.

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