Murray Darling Program Working Paper : M 07 # 4

In this paper we experiment with an original format of a Choice Modelling questionnaire developed to capture preferences from respondents with different property right frame of references. The format includes both WTP and WTA choice alternatives for native vegetation management. It is well documented in the literature that WTP and WTA differ considerably when the property right frame of reference changes. Accounting for different property right regimes is important because it greatly improve policy assessment. It would indeed possible to determine the direction of change from the current policy. Would it be optimal to tighten a standard or loosen it? Introduction This paper addresses two issues. First, we investigate the willingness-to-pay (WTP)/willingness-to-accept (WTA) disparity using the Choice Modelling (CM) technique. Second, we use the same Choice Modelling application to test the efficiency of native vegetation protection measures the state of Queensland (Aus) introduced in 2004. Theory and experiments have been widely used to analyse the disparity between WTP and WTA. The gap is often interpreted as an “endowment effect” where the initial endowment affects the rate of exchange between goods. Prospect theory states that endowment effects and loss aversion—people commonly value losses much more than commensurate gains—describe a fundamental feature of human preferences (Tversky and Kahnemann 1991). The neoclassical model of decision making, on the Native Vegetation 29/10/2007 contrary, assumes that preferences do not depend on the current assets and that the initial entitlement does not change the final allocation. The WTP/WTA disparity is then taken as evidence that individuals do not have Hicksian preferences. Many experimenters have observed significant differences between WTA and WTP measures (see Horowitz and McConnell 2002); many others have not (see Plott and Zeiler 2005). Hence, the observed disparity could be the result of weak methods for preference elicitations. That is, in some experimental settings individuals may not reveal their true preferences. The existence and interpretations of the WTP/WTA disparity have important implications for the design and implementation of environmental policies. WTA and WTP imply different property right regimes. If the two measures diverge, environmental policies could be substantially altered by the assignment of property rights. For instance, assume the public’s WTP for native vegetation conservation is half the WTA compensations for loss of native plants. Also assume developers would willingly buy or sell land at the prevailing market prices. The amount of native vegetation protected when rights are assigned to developers and had to be purchased by the public would be less than the amount protected if the developers had to purchase rights from the public (Horowitz and McConnell 2003). The Queensland’s native vegetation legislation assumes the first property right regime. The 2004 Vegetation Act Amendment Bill (Queensland Department of Natural Resource and Water) phased out broad scale land-clearing by 2006. It aims to protect Queensland’s biodiversity and addresses salinity, soil degradation and water quality problems. The Bill provides $150 million in financial assistance that will take primarily two forms. First, the Government can buy landholders out if their business if not longer viable after the introduction of the new legislation. The Government will pay the value of the land determined on the basis of the development potential prior to the legislative change. Second, incentives for protection of native vegetation are assigned through tenders for funds. This process is expected to deliver biodiversity and landscape outcomes and to provide income to landholders. Overall, for the intervention to produce an efficient outcome, the amount paid by the government should be less than the value of biodiversity services generate by new land uses. It is plausible that some members of the public have different views on the correct Native Vegetation 29/10/2007 property right regimes. In order to assess the efficient of a policy, it is then necessary to check how benefits from development compare to conservation and biodiversity benefits estimated under the two property right regimes. Indeed, if WTP and WTA differ substantially, a policy may pass the efficient test under one regime but not the other. Of course, if WTA and WTP do not differ, the way benefits are estimated is not relevant. We design a CM study to address the issue of the hypothetical disparity of WTP and WTA for changes in land use and native vegetation conservation. In environmental valuation studies, the common practice is that monetary attribute of the policy under valuation is either framed as WTP or WTA. That is, the monetary attribute changes in one direction only with reference to the status quo. The reason is to avoid “endowment effects”. However, evaluating an environmental change under either the WTP or the WTA framework makes impossible to capture preferences based on different property right frames of reference. Farmers may protest to policies requiring them both to pay for environmental conservation through taxes and to give up agricultural land to native vegetation. On the other hand, some section of the public may abhor the idea of gaining monetary benefits in order to loose environmental services. As a result, the evaluation exercises may leave out the preferences of important policy’s stakeholders. Our CM application divides the sample in two groups. One group receives a CM questionnaire proposing policies that are both more and less expensive than the current native vegetation policy. That is, the contribution to the policies could be negative or positive –respondents would pay more or less in taxes than what they are actually paying. The second group receives a standard CM questionnaire in which the same policies are framed in terms of WTP. Respondents in this group are asked to pay no less than their current contribution to environmental conservation policies. One would expect that the two different treatments produce different results. In what direction? A symptom of endowment effects would be that when respondents face a policy proposal that entails compensation for an environmental change, they would require larger monetary payments than in case the policy asks respondents to pay. By splitting the sample in two, the respondents receiving the WTP questionnaire format would work as a control group. Native Vegetation 29/10/2007 This study is the first application of the CM technique to investigate the WTA/WTP disparity. Several Contingent Valuation (CV) studies and experiments have tackled the problem. CM has an advantage over CV. It asks respondents to repeat the choice task several times. Plott and Zeiler (2005) show that practicing to choose help respondents to discover preferences and then reduce the WTP/WTA gap. The paper is organised as follow. In section 1 we briefly review of the literature on ‘endowment effects”. Section 2 contains a description of the Choice Modelling technique. In section 3 we illustrate the institutional framework, the study area, and the design of the study. Section 4 illustrates the sampling and survey administration. Results and discussions are reported in section 5. In section 6 we conclude. 1. Endowment effects in Stated Preference methods. Stated preference (SP) techniques such as Contingent Valuation (CV) and Choice Modelling (CM) are the only available methods for the estimation of ‘passive use’ or ‘non-use values’. These techniques are based on the creation of hypothetical markets for the exchange of public goods. The transactions in hypothetical markets generate a set of data which is then used to estimate the benefits of environmental changes. SP techniques are often regarded with scepticism because they are troubled with anomalies–i.e. systematic inconsistencies between the theory used to organise the data collection and interpretation, and the pattern of individuals’ responses. The disparity between WTP and WTA is on of these anomalies. While the Hicksian theory does not imply WTP=WTA (Hanemann 1991), Sudgen (2006) argues that the difference should be small. For an individual with Hicksian preferences, if the WTP is only a small fraction of income–as is expected for environmental goods– the gap between WTP and WTA should be in the order of few percentage points (Sudgen 1999, p.159). Horowitz and McConnell (2002) review 45 WTP/WTA studies–for a total of 201 experiments–and find that WTA is about seven times higher than WTP. Theory and estimates are clearly at odds. In order to improve the reliability of elicitation methods, hypothetical data have been enriched with observations obtained from revealed preference methods. This approach combines observations from real but surrogate markets and hypothetical markets. Adamowicz et al. (1994) pioneered this approach in the field of Native Vegetation 29/10/2007 environmental valuation. They found sufficient evidence to claim that revealed and SP data contain a similar preference structure. They also cannot reject the hypothesis that the underlying variance of the two datasets is different. In other words, while the parameter point estimates are not statistically different, stated preference estimates have larger variance. Controlled, theory-driven experiments in laboratory settings have also been designed to assess the magnitude of the hypothetical bias. Experiments are typically set up as direct revelation mechanisms in which individuals have a dominant strategy to reveal their true valuation of the good. In SP methods, individual responses to valuation questions do not entail a real economic commitment or real economic consequences. On the contrary, in experimental valuation, the revelation mechanism entails a real economic commitment, or consequence, or both. In three simple Dichotomous Cho