Warm glow in biodiversity valuation and policy by Paulo A.L.D. Nunes Institutions for Providing Global Environmental Goods Louvain-la-Neuve, 15|16 June 2006
Outline � Motivation and background � Research proposal: assessment of the profile of a warm glower � Discussion of the estimation results (two studies) � Policy implications and conclusions 2
Survey valuation, embedding and warm glow � We illustrate the embedding problem with the following experiment: Group 1: willingness to pay X for the protection plan A Group 2: willingness to pay Y for the protection plan B Group 3: willingness to pay Z for the protection plans A and B Embedding is present when X+Y>Z, => the rejection of the adding-up valuation hypothesis. 3
Possible interpretations � If the benefits of providing different public goods are each independently estimated in a partial equilibrium framework then summing independent values, X and Y, overestimates the total benefits, Z, of the provision by ignoring substitution and income effects . 4
Possible interpretations � Verbal protocols allow researchers to register how respondents think while they answer the elicitation question. From this analysis psychologists developed mental models that are able to account for the presence of a part-whole interpretation, i.e., the respondent values much more than the researcher intended to value: – In practice: when the respondent is asked the value of each public good independently, e.g. X and Y, such an individual corrects the “foolish” question asked by a “silly” researcher and provides a value for the total provision of the public good, Z. 5
Possible interpretations � View CV responses as a way to signal warm glow considerations, interpreted as the pleasure derived from giving to good causes or simply from concern over the environment. � If this warmglow or moral satisfaction presents rapidly diminishing marginal utility with respect to the size of the gift, then we may expect that respondents will bid about the same for obtaining moral satisfaction. – Bearing on our illustration, we would have X=X’+C; Y=Y’+C and Z=Z’+C where C is the value attached to the warmglow of giving and Z’=X’+Y’ – Then the sum of the individual protection plans will be Z’+2C, which is greater than Z=Z’+C, the value of the two protection plans jointly. 6
Warm glow: on one hand… � Jerry Hausman, Peter Diamond, William Desvousges and Paul Milgrom express their doubts with respect to the suitability of CV results for inclusion in benefit- cost analyses - “Is a number better than no number?” � The skepticism is particularly strong when the CV application is addressed to measure nonuse values. � For nonuse values, as measured by survey methods, to be consistent with economic theory “ it would be necessary for respondent’s individual existence values to reflect only their own personal economic motives and not altruistic motives, or a sense of duty, or moral obligation” (Milgrom, page 431) 7
Warm glow: on the other hand… � Tendency for CV respondents to signal noneconomic considerations, indicating that respondents biding captures inter alia consumer welfare associated with the personal satisfaction provided by the act of giving – Kahneman and Knetsch, 1992, JEEM moral satisfaction – Nunes, 2002, EJOR, consumer motivationings and warm glow motivation function – Nunes and Schokkaert, 2003, JEEM, latent valuation function, warm glow valuation mechanism and dry WTP 8
Theoretical reference: � This idea is inspired by the work of Andreoni on impure altruism: (1989, Journal of Political U i (Y i , G, x i ) U i (Y i , G, x i ) Economy;1990, Economic Journal) with G = x i +x j with G = x i +x j � The underlying idea: individual consumer contributes to the provision of a public good for two reasons. First, because she simply wants more of the public good and, secondly, because she derives some private benefit from contributing to its provision. 9
Research proposal � Identify psychological motivation of warm glow � Integrating latent motivational factors in the valuation function � Identifying the warm glow contributor profile � Discussion of the empirical results in terms of policy implications 10
Identify psychological motivation of warm glow � Introduce in the CV questionnaire a list of attitudinal questions Our family admires the individuals who, on voluntarily Our family admires the individuals who, on voluntarily basis, participate in collecting donations for national basis, participate in collecting donations for national programs for social aid and solidarity programs for social aid and solidarity (8WG.) (8WG.) I am happy with myself whenever I give a financial I am happy with myself whenever I give a financial contribution to national fund raising campaigns contribution to national fund raising campaigns (WG20.) (WG20.) 11
Identify psychological motivation of warm glow � Introduce in the CV questionnaire a list of attitudinal questions Our family admires the individuals who, on voluntarily Our family admires the individuals who, on voluntarily basis, participate in collecting donations for national basis, participate in collecting donations for national programs for social aid and solidarity programs for social aid and solidarity (8WG.) (8WG.) RESPONSE CATEGORIES WORDING (CODING): I am happy with myself whenever I give a financial RESPONSE CATEGORIES WORDING (CODING): I am happy with myself whenever I give a financial contribution to national fund raising campaigns I COMPLETELY AGREE (5) contribution to national fund raising campaigns I COMPLETELY AGREE (5) (WG20.) I AGREE (4) (WG20.) I AGREE (4) SOMETIMES I AGREE, SOMETIMES I DISAGREE (3) SOMETIMES I AGREE, SOMETIMES I DISAGREE (3) I DISAGREE (2) I DISAGREE (2) I COMPLETELY DISAGREE (1) I COMPLETELY DISAGREE (1) 12
Consumer motivation latent factors (see Nunes, 2002, EJOR) � Identification model – task: identify latent factor constructs. � Confirmatory factor analysis – task: assess the validity of the retained warm glow latent factor. � Measurement model – task: compute individual warm glow motivation factor scores. 13
Warm glow factor loadings after varimax rotation Estimate Survey motivational question 0.56 Our family admires the individuals who, on voluntary basis, participate in collecting donations for national programs for social aid and solidarity. 0.60 There are some funding campaigns to which my family and I feel very close and therefore we do not hesitate to contribute with a donation. 0.47 It is difficult for me to decline my help to other individuals who, either in the streets or at my door, beg for charity. 0.57 I am happy with myself whenever I give a financial contribution to national fund raising campaigns. 0.58 My family and I like to contribute to good causes such as the protection of the environment, and whenever we can afford it, we do not decline our help to such fund raising campaigns. Source: Nunes (2002) 14
Integrating latent motivational factors in the valuation function (see Nunes and Schokkaert, 2003, JEEM) ( ) − av f 1 = Λ + Ξ f ' ' av = Λ Λ Λ ˆ ˆ ˆ ˆ * * * Estimate individual warm glow motivation scores and plug it into the valuation function + � � r = β δ δ hj ln WTP x f e ij + + ij j kj ki hi k h BAU Latent structure 15
Integrating latent motivational factors in the valuation function (see Nunes and Schokkaert, 2003, JEEM) The estimation results showed: The estimation results showed: ( ) − av f 1 a) The empirical validity that reported WTP responses = Λ + Ξ a) The empirical validity that reported WTP responses f ' ' av = Λ Λ Λ ˆ ˆ ˆ ˆ * * * consist of two different value components: one consist of two different value components: one relating to the value attributed by the respondent to relating to the value attributed by the respondent to the public good, the second relating to the the public good, the second relating to the Estimate individual warm glow motivation scores and psychological motivation of warm glow psychological motivation of warm glow plug it into the valuation function (econometrically a robust parameter) (econometrically a robust parameter) b) The possibility to disentangle to warm glow + � � b) The possibility to disentangle to warm glow r = β δ δ hj ln WTP x f e ij + + valuation mechanism from the reported WTP ij j kj ki hi valuation mechanism from the reported WTP k h responses responses (compute dry WTP responses) (compute dry WTP responses) BAU Latent structure 16
Present study: objective Explore in more detail de warm glow transmission mechanism, focusing on, inter alia , � one or more warm glow mechanism(s) � does it depend on the type of the good under consideration (and its provision levels), � it is the same across different types of individuals, or not 17
Present study: objective Two valuation studies: CV: one valuation object and explore individual warm glow motivational profile ABM: two valuation objects and warm glow motivational profile per stakeholder 18
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