Contingent valuation and the budget constraint

One of the most vehemently debated techniques for the valuation of environmental goods is the contingent Valuation method. Critics of this method question its validity and reliability in many respects. However, at the moment the contingent valuation method is the only technique at hand for the assessment of non-use Values of environmental goods. Therefore, it seems worthwhile to have a closer look at some of the criticism raised in this debate. This paper deals with the so-called budget constraint bias which is suspected of distorting the results of contingent valuation studies. According to the critics of the contingent valuation method, the stated willingness-to-pay for an environmental good as assessed by contingent valuation studies is systematically biased upwards because participants of such surveys do not properly observe their personal budget constraints. It is maintained that respondents when asked about their willingness-to-pay for an environmental good do not regard the amount stated by them as reducing their budget left for the purchase of private goods. In this paper it is shown that from a theoretical point of view respondents intuitively do the right thing when ignoring the seeming relationship between their willingness-to-pay for an environmental good and their capacity to buy private goods. It is elucidated that contingent valuation surveys should focus on the assessment of the shadow price of an environmental good rather than of the respective willingness-to-pay. Therefore, it seems that the budget constraint bias is meaningless with respect to the validity of the contingent valuation method. (C) 1998 Elsevier Science B.V. All rights reserved.