Willingness to pay towards a public good: how does a refund option affect stated values?

Abstract

Mandatory taxes and/or voluntary contributions are commonly adopted as the payment vehicle when eliciting willingness to pay (WTP) in environmental valuation studies. While mandatory taxes may arouse negative feelings, voluntary contributions may lead to strategic behaviour (over bidding) or free riding (under bidding). In this paper, we explore an alternative payment vehicle which avoids the draconian undertones associated with taxes and may be more incentive compatible than a voluntary contribution – a tax that incorporates a refund option. The template for such a payment vehicle is the value added tax charged to tourists in Ireland, but which can be reclaimed on exiting the country. In the context of raising public funds to support the conservation of rural countryside landscape, a comparison is made between the elicited WTP via a mandatory tax and that elicited via the alternative payment method incorporating a refund option. While we observe similar participation rates between the two payment methods, the refund option reveals a higher stated WTP.

Keywords:

• beneficiary pays principle
• willingness to pay
• refund option
• rebate
• bivariate ordered probit

Notes

1. Stithou and Scarpa (2012) discuss this issue in more detail.

2. Subsidy payments accounted for 143% of farm income in 2009 compared to 86% in 2004 (Hennessy et al. 2011).

3. Ivehammar (2009) report WTP levels using donations to be less than or equal to WTP values resulting from taxes, depending upon the type of taxes used (Increase in local taxes each year for 10 years vs. a redistribution of the local tax revenue).

4. Consumer products are generally subject to additional value added tax (VAT) which tourists are required to pay while making purchases in commercial shops. VAT in Ireland currently stands between 16% and 21% of purchase price. This tax relief is not applicable to purchase of services, such as hotel accommodation, meals, car hire, etc. Further details on this scheme are available at http://www.revenue.ie/en/tax/vat/leaflets/tax-free-shopping-tourist.html (Accessed 18th April 2013).

5. It should be noted that this elicitation method for the reclaim probability may be prone to a number of biases similar to those afflicting typical stated WTP formats, such as hypothetical bias and strategic behaviour, since we are dealing with a hypothetical payment situation.

6. The models are estimated using the user written command cmp in Stata (Roodman 2011).

7. We also estimate a sequential model where the stated WTP with a mandatory tax is included as an explanatory variable in the other two models, and the stated WTP with a refund option is used to explain the probability of reclaiming also. The signs and significance are as expected and results are very similar, so we omit these results although they are available from the authors on request.

Additional information

Funding

This work was supported by the Irish Department of Agriculture, Fisheries and Food as part of a rural stimulus funded project.