Been There Done That: Disentangling Option Value Effects from User Heterogeneity When Valuing Natural Resources with a Use Component
Endogeneity bias arises in contingent valuation studies when the error term in the willingness to pay (WTP) equation is correlated with explanatory variables because observable and unobservable characteristics of the respondents affect both their WTP and the value of those variables. We correct for the endogeneity of variables that capture previous experience with the resource valued, humpback whales, and with the geographic area of study. We consider several endogenous behavioral variables. Therefore, we apply a multivariate Probit approach to jointly model them with WTP. In this case, correcting for endogeneity increases econometric efficiency and substantially corrects the bias affecting the estimated coefficients of the experience variables, by isolating the decreasing effect on option value caused by having already experienced the resource. Stark differences are unveiled between the marginal effects on WTP of previous experience of the resource in an alternative location versus experience in the location studied, Newfoundland and Labrador.
In intuitive terms, we have an "egg-or-chicken" kind of problem whereby those who go whale watching tend to do so because they value whales and enjoy knowing that they are safe while, so when we see that whale watchers are willing to pay more for whale protection, it is not easy to tell whether this is because they saw whales before as such, or because they are the kind of people who went to see whales because they value them. Indeed, we find that at first sight the benefit derived from a hypothetical policy of protection of Newfoundland whales is larger for those who have been whale watching in this province already. However, a closer look reveals that having seen whales here actually reduces that benefit, which is quite intuitive, something masked in the usual, simpler statistical analysis by the stronger positive effect of being a person concerned about whale well-being in general. On the other hand, having seen whales elsewhere only increases ones willingness to pay to help protect Newfoundland whales, in order to preserve the option of whale watching in the province in the future.
Published in: Environmental Management, November 2012, v. 50, is. 5, pp. 819-836