Indifference or Misspecification? The Distributional Impacts of Indifference on Dichotomous Choice Contingent Valuation

Dichotomous choice (or Referendum) contingent valuation surveys have become the predominate choice for valuing goods and services otherwise not valued in a standard market (nonmarket goods and services). A number of researchers have recently recommended that dichotomous choice contingent valuation studies include a follow-up question to all no responses to determine whether the no response is a result of unwillingness to pay, or indifference. If the goal of the study is to investigate the impact of covariates on either mean willingness to pay or the probability of indifference, simple identification of indifferent individuals will not suffice. A simulation study shows that existing econometric models designed to account for indifference are extremely sensitive to misspecification bias. Accurate identification of the probability of indifference is hampered by potential misspecification of the distribution of willingness to pay. a The author wishes to thank Ted McConnell, John Whitehead, and Ju-Chin Huang for helpful discussions in developing this paper. Further, John Whitehead and Ju-Chin Huang are to be thanked for making available the use of the data from the 1995 Albemarle/Pamlico Sound CV Survey. Any remaining errors are fully attributable to the author. b Department of Economics, East Carolina University, Greenville, NC 27858. E-mail: [email protected].