PRELIMINARY DRAFT Not for citation Credibility of Information Sources and the Formation of Individuals' Option Prices for Climate Change Mitigation

Ex ante willingness to pay to prevent adverse environmental change depends on people's perceptions about just how bad the situation will become if mitigation policies are not adopted. These perceptions are influenced by an array of external information sources that might be deemed more or less credible by individuals. I describe an empirical game plan wherein people's native prior distributions on future environmental quality are elicited first. Respondents are then provided with "external" information from different sources. I assume Bayesian updating as a consequence of this additional information. Respondents' subjective posterior distributions then underlie their responses to a referendum contingent valuation question regarding a mitigation program. It is assumed that individuals are expected utility maximizers and that option prices (the appropriate ex ante welfare measure in the face of uncertainty), are based on their subjective uncertainty. State-dependent preferences lead to an expected utility-difference function across the two alternatives in the referendum question that depends on the mean and variance of the subjective posterior distribution. The referendum discrete choice option price equation can be estimated simultaneously with the Bayesian updating equations for the mean and variance of climate variables absent mitigation. The model will allow the researcher to simulate counterfactually the effects on option prices of changes in factors that influence the Bayesian updating of probabilities and/or factors that enter directly into the expected indirect utilitydifference function. * Thanks are due to Jack Hirshleifer and to Barri Grossman for helpful comments, and to my Economics 204G class and to Kathleen McGarry's Spring 1997 Economics 11 class for their participation in survey trials. Cameron page 2 Credibility of Information Sources and the Formation of Individuals' Option Prices for Climate Change Mitigation