Professor Susan Chilton- Using a Veil of Ignorance to incorporate citizen preferences in willingness-to-pay values

 Susan Chilton, Professor of Economics, Newcastle University Business School.

Using a Veil of Ignorance to incorporate citizen preferences in willingness-to-pay values.

Thursday 17 May 2018, 11:00 to 12:00
Institute for Transport Studies, room 1.11, University of Leeds

Abstract:

For consistency with Benefit Cost Analysis (BCA), willingness to pay (WTP) values from stated preference surveys should reflect individuals’ private, self-interested value for the public good. In reality, we know that at least some individuals derive utility from others’ consumption of certain public goods. If these preferences are purely altruistic then this is problematic for BCA. Provision of the public good will be inefficient due the well-known problem of “double counting”

This paper develops a new methodology for gathering ‘citizen’ preferences and tests it in the laboratory, with a view to transferring it into future valuation studies. The proposed methodology invokes a Veil of Ignorance (VoI) on respondents so that purely altruistic concerns are filtered from the valuation whilst paternalistic and distributional concerns remain. The primary research question is to consider the effect of a VoI on WTP values when social preferences exist in the respondents’ utility function. An experiment was conducted to test the validity of the proposed methodology as a tool for regulating problems created by pure altruism.

In general, purely altruistic preferences are expected to manifest as a symmetric shift towards the group optimal away from the private optimal and distributional preferences are expected to cause a shift in the direction of the optimal of the individuals who have garnered sympathy. The VoI allows the proposed methodology to employ a level of uncertainty over individuals’ position within the societal distribution as they choose a level of provision of a public good. The addition of a VoI results in individuals seeking a level of public good provision that represents an optimum based on their social and risk preferences. This leads to an interesting result in which self-interested and purely altruistic optimals become equivalent so that purely altruistic preferences are indistinguishable from selfish preferences whilst distributional preferences are still apparent. This suggests that the problems associated with purely altruistic preferences entering values are negated by the proposed methodology.

To test this hypothesis, the Random Price Voting Mechanism (RPVM), an extension of the Becker-DeGroot-Marschak (BDM) method, is used as a mechanism to efficiently elicit WTP values for a public good which allows the avoidance of negative lotteries. A four treatment design is used to test for within sample differences in WTP values between groups that are either homogenous or heterogeneous in their endowments and induced private values. Treatments 1 and 2 gather WTP for individuals in front of the veil, whilst Treatments 3 and 4 considered the same scenarios behind the veil. Individuals are placed in groups that have either symmetrically (T1 & T3) or asymmetrically (T2 & T4) distributed endowments and values.

Using the difference between WTP values from the heterogeneous and homogenous groups as a measure of social preferences, results show that purely altruistic preferences are apparent in the baseline treatments when the VoI is not present. This is seen as statistically significant shifts towards the efficient group provision when groups are made up heterogeneous individuals. When the VoI is present WTP tend to be indifferent from the self-interested baseline. This suggests that the citizen frame, elicited with the VoI mechanism, is capturing the social preferences.

About Susan:  The academic core of Susan’s research is applied welfare economics, centering on the use of surveys and experimental situations to understand how individuals make decisions affecting their economic welfare. Her work is based in environmental economics, safety economics and health economics.