Private Enterprise and Financial Markets > Environment > Urban Environment and Pollution Control
A Review of the Use of Contingent Valuation Methods in Project Analysis at the Inter-American Development Bank
By Sergio Ardila, Ricardo Quiroga, William J. Vaughan (12/98, ENV-126, En)
The elicitation of the values that individuals attach to various environmental improvements can be undertaken using either revealed or stated preference methods, the difference being that revealed methods use actual data observed in functioning markets while stated preference methods employ constructed markets in an experimental setting to elicit peoples' preferences. The most widely used stated preference method is contingent valuation (CV), which tries to get at willingness to pay in money terms for a posited change in environmental conditions. Recently, interest has grown in so called conjoint stated preference methods that do not ask about willingness to pay directly, but instead undertake experiments involving contingent ranking of, or contingent choice among, alternatives that provide different levels of non-marketed public goods or their multi-dimensional attributes.
This paper reviews the past ten years of the Inter-American Development Bank's experience with stated preference methods, concentrating on their use in the cost-benefit analysis of projects supplying sewer service and improving ambient water quality in Latin America and the Caribbean. It discusses the characteristics of nearly a score of projects, and the nature of the analysis undertaken to design and approve them. It reports the range of willingness to pay estimates involved, and comments on some of the most important economic analysis issues that appear to have arisen. Among these are the effect that alternative econometric specifications of the choice model can have on our estimates of average (or median) household willingness to pay derived from referendum CV surveys, the need to match what any investment project purports to achieve in a CV survey to what it will actually achieve in practice, and the role of sensitivity analysis in portraying the distribution of expected gross and net project benefits.
In the main we find that the revealed preference method of hedonic analysis has rapidly given way to contingent valuation as an approach to environmental benefit estimation in project analysis, but few, if any, "non-traditional" conjoint applications have been undertaken. Some promising areas for the IDB's future application of these new, less familiar methods are suggested, as are some more "conventional" needs.
Last updated: 01/16/07
