A note on the warm glow of giving and scope sensitivity in contingent valuation studies
Introduction
Contingent valuation (CV) is a stated preference method for estimating the “worth” – in terms of money – of a public good to an individual. The technique is most widely used to value environmental public goods but is becoming increasingly popular in other fields such as health. Underlying this method is the assumption that respondents are able to construct unique economic values for these goods by referring to their own well-constructed and known preference orderings. Furthermore, and of particular importance to this paper, they are assumed to act in a “market-like” manner, treating the transaction as equivalent to the purchase of a consumption good. As such, their willingness to pay (WTP) should be “scope-sensitive” i.e., responsive to, differing quantities and qualities of the public environmental good.
This assumption that respondents treat the purchase of the environmental good in the same manner as they view the purchase of a private consumer good is not without controversy. Kahneman and Knetsch (1992) – based on Andreoni, 1989, Andreoni, 1990 adjustments to the earlier models of Bergstrom, Blume and Varian (1986) and Cornes and Sandler (1986) regarding the private provision of public goods – raised the question as to whether respondents treated their request for a WTP amount as they would a donation to charity. They termed this the purchase of “moral satisfaction”. Using the terminology of Andreoni, this is known as “warm glow”.
The nature of CV, i.e., asking an individual to make a private (albeit hypothetical) contribution to a publicly provided environmental good certainly opens up the possibility that respondents perceive an opportunity to enjoy private, warm glow benefits from hypothetical contributions to the provision of the good. If so, then at least three different types of preferences may underlie WTP bids. The respondent may only be concerned with the public benefits, i.e., quantity and/or quality, of the good. These preferences are termed altruistic, and are of the type implicitly assumed to underlie CV. Alternatively, the respondent may only be concerned with the private, warm glow benefits of giving and is not interested in the quantity/quality provided. These preferences are termed egoistic. Finally, preferences may be impurely altruistic. In this case, the respondent is interested in both the public and private benefits. If warm glow giving is present then, extensions to the traditional utility and household expenditure functions are required if warm glow giving is to be incorporated into subsequent CV models. This is shown below to be a straightforward task. If accepted, it then becomes clear that these different underlying preferences can lead to five behavioral possibilities into which CV responses may be classified.
Section snippets
Extending CV respondents' utility and expenditure functions to include warm glow benefits
Andreoni, 1989, Andreoni, 1990 outlines the general case (i.e., mixed preferences) direct utility function that takes account of these potential different underlying preferences. In the case of an environmental good we havewhere Ui is the utility function of individual i (i=1,…,n), Xi the private goods consumption of individual i, E the level of provision of (services from) the environmental good and gi is the individual’s donation to its provision. The “special” cases follow
Potential behavioral classification CV responses
Considering the general case specified in the equations above, an individual’s utility may be related to the level of the altruistic argument (E). This scope sensitivity can be tested for quite simply by varying the level of provision of E and then observing if this affects WTP. Conventional economic theory predicts that a positive relationship should normally exist between WTP and an improvement or quantity increase in a good, provided that the individual is in the range of non-satiation.
Empirical evidence of the presence of different underlying preferences
We now report some empirical evidence in support of the predictions outlined in Table 1. As part of a wider CV study (Hutchinson, Chilton & Davis, 1995), a sample of 134 respondents were each asked to bid for 10% and 20% increases in the level of forestry in Ireland. This provides the scope-sensitivity test. In addition, a self-reported warm glow disembedding question (based on Chestnut & Rowe, 1990; Rowe, Schulze, Shaw, Schenk & Chestnut, 1991; McClelland et al., 1992) was administered to each
Concluding comments
This note set out to identify, and subsequently examine empirically, the potential types of CV responses that may arise if warm glow giving is present. Evidence from economic theory and anecdotal evidence from CV field studies suggest that warm glow may be a significant feature within contingent markets. Champ, Bishop, Brown and McCollum (1997) go so far as to suggest a particular type of CV mechanism which would allow warm glow to be included and accounted for in the response. This particular
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