The sensitivity of willingness to pay to an economic downturn

Abstract

Stated preference studies are typically undertaken at one point in time, while the results may be relied on in decision-making several months or even years later. This reliance is only justified if values are stable over time, an assumption which is doubtable given the onset of an economic downturn. We assess the reliability of values taken before an economic downturn for application during the downturn, via analysis of responses to two near-identical surveys conducted, respectively, before and during the 2008–2010 economic recession. The surveys were valuing near identical sets of permanent water sector service and environmental improvements. Each survey employed a dichotomous choice and a payment card contingent valuation question. Our main result is that the economic downturn led to lower payment card responses but had no effect on the values elicited via a dichotomous choice (i.e. referendum-type) contingent valuation question. We explore potential explanations for this finding in light of the literature on closed-ended versus open-ended elicitation method comparisons.

Keywords:

• contingent valuation
• stated preference
• willingness to pay
• water
• utilities
• regulation

JEL codes:

• Q25
• Q51
• D60

Acknowledgements

The research presented in this paper is based on a study undertaken for and funded by Thames Water Utilities Ltd. The views expressed and any errors herein are those of the authors alone.

Note

Notes

1. We calculated the difference between the draft business plan (DBP) and final business plan (FBP) service improvement measures for each attribute, and used these to derive an index for the FBP based on the DBP and the current service level. If all proportional attribute improvements were given equal weighting by respondents, this approach determines that the FBP would imply ‘1% more’ improvement than the DBP; that is, probably a fairly trivial difference from the perception of respondents. Ideally, we would use weights which match the relative values of the attributes rather than constant weights; however, determining these weights is beyond the scope of this study.