Do Explicit Warnings Eliminate the Hypothetical Bias in Elicitation Procedures? Evidence from Field Auctions for Sportscards

The goal of environmental policy is to protect the well-being of humans and the ecosystems vital to human existence. Because benefit-cost analyses are now required at the federal level, and increasingly at the state level, much attention has been paid to the development of practical, credible approaches for estimating the benefits and costs of environmental programs. Although policy makers have a good handle on measuring the explicit costs associated with increased environmental protection, at present several disparate approaches are utilized to measure economic values of environmental goods and services. Arguably the most contentious of these approaches is the Contingent Valuation Method (CVM), which allows the researcher to measure the total value of the commodity in question (see Peter A. Diamond and Jerry A. Hausman's [1994] critical review). Chief amongst these concems is whether hypothetical bias is inherent in CVM responses. Some recently published studies provide evidence that suggests important differences exist between responses from real and hypothetical valuation questions.1 Recognizing this shortcoming, researchers have adopted both ex ante and ex post techniques to overcome hypothetical bias. Although these attempts have not been completely successful in dealing with hypothetical bias, Ronald G. Cummings and Laura 0. Taylor (1999) present evidence from laboratory experiments that indicates hypothetical bias can be overcome by an appropriate ex ante design they refer to as a "cheap talk" scheme.2 The underlying premise behind Cummings and Taylor's design is that by making hypothetical bias an integral part of the contingent value questionnaire, the researcher can induce truthtelling. Their cheap talk experiments validated this conjecture, as hypothetical bias was effectively eliminated in open referenda for three public goods. The goal of this study is to take the cheap talk design to a well-functioning marketplace and auction off sportscards. Besides providing a field validity test, I also explore the generality of Cummings and Taylor's findings by examining whether experience with the good in question affects hypothetical bias through inclusion of both card dealers and nondealers in the field auctions. The theory of value formation suggests that experienced bidders may not be easily swayed by the cheap talk design as they have a well-structured preference ordering for the good in question and should therefore rely on few, if any, external signals when formulating their value.