Individuals’ Valuation Distributions: Theory & Measurement1

Traditional economic valuation approaches assume that each individual has a single "true" value for a good or service in her mind that can be retrieved at will. Instead, we contend that an individual’s maximum willingness to pay (WTP) is best viewed as a random variable with an associated distribution. To measure individuals’ valuation distributions, we propose a new contingent valuation (CV) elicitation procedure the stochastic payment card approach. An empirical study was conducted in Sofia, Bulgaria to implement this new valuation approach and to contrast it with the traditional referendum elicitation procedure. The results obtained using the stochastic payment card approach are quite different than those obtained from the referendum model, and support recent findings that the referendum CV approach could overestimate people’s WTP. Moreover, the results show that the estimated variance of an individual WTP distribution is not white noise, which support our theoretical argument that each individual’s willingness to pay for a good or service is best conceived as a probability distribution associated rather than a single number.