One-and-one-half-bound Dichotomous Choice Contingent Valuation

Although the double-bound (DB) fonnat for the discrete choice contingent valuation method (CVM) has the benefit of higher efficiency in welfare benefit estimates than the single-bound (SB) discrete choice CVM, it has been subject to criticism due to evidence that some of the responses to the second bid may be inconsistent with the responses to the first bid. As a means to reduce the potential for response bias on the follow-up bid in multiple-bound discrete choice formats such as the DB model while maintaining much of the efficiency gains of the multiplebound approach, we introduce the one-and-one-half-bound (OOHB) approach and present a real-world application. In a laboratory setting, despite the fact that the OOHB model uses less information than the DB approach, the efficiency gains in moving from SB to OOHB capture a large portion of the gain associated with moving from SB to DB. Utilizing distribution-free seminonparametric estimation techniques on a splitsurvey data set, our OOHB estimates demonstrated higher consistency with respect to the follow-up data than the DB estimates and were more efficient as well. Hence, OOHB may serve as a viable alternative to the DB fonnat in situations where follow-up response bias may be a concern. chosen poorly and were quite far from optimal; but HLK found that the second prices counteracted this and provided effective insurance against the poor selection of an initial price. Because of its statistical efficiency, the DB approach has gained in popularity and is now often favored over the SB approach. At the same time, however, it has aroused controversy because of evidence that responses to the first price may sometimes be inconsistent with the responses to the second, with the latter revealing a lower WTP (Hanemann, 1991; McFadden and Leonard, 1993; Cameron and Quiggin, 1994; Kanninen, 1995; Herriges and Shogren, 1996; DeShazo, 2000). Several explanations have been proposed for the anomaly. Carson et al. (1992) suggest an explanation based on cost expectations: a respondent who said "yes" to the initial price sees the second price as a price increase, which he rejects; a respondent who said "no" and is then offered a lower price may suspect that an inferior version of the item will be provided, which he also is disposed to reject. Altaf and DeShazo (1994) suggest that the second bid converts what had seemed to be a straightforward postedprice market into a situation involving bargaining; if this is bargaining, the respondent should say no in order to drive the price down. DeShazo (2000) offers a prospect-theory explanation involving loss aversion and framing on the first price. Existing applications of the DB approach all use scenarios where the respondent is not told ahead of time that she will be confronted with a second price; the interview focuses mainly on the first price, and the second price comes as something of a surprise when introduced at the end. We suspect that this surprise may be the root cause of the discrepancy in the responses to the two prices. To remedy this, we propose an alternative survey design in which the respondent is given two prices up front and told that, while the exact cost of the item is not known for sure, it is known to lie within the range bounded by these two prices.l One of the two prices is selected at random, and the respondent is asked whether she would be willing to pay this amount; she is then asked about the other price only if doing so would be consistent with the stated price range. For example, if the lower of the two prices was selected initially and she says "yes" to this, she is then asked whether she would be willing to pay the higher price; but if she says "no" to the lower price, there is no follow-up question, because that would go below the stated price range. We believe that eliminating the element of surprise has the potential to remove discrepancies in the responses to the two valuation questions, but it comes at the cost of not always being able to ask the second