Projection bias in decision-making: Daily air pollution and willingness to pay for better air quality

Previous psychological and economic studies have observed systematic biases in people’s predictions of their future utilities. In this paper, using repeated contingent valuation (CV) surveys conducted with a very high frequency (every two weeks, in total 29 waves) in Nanjing, China during July 2014 to June 2015, we tested whether people’s expected future utility for better air quality is overly influenced by the air quality at the moment of valuation. As air quality, in general, is subject to high day-to-day variability, its negative impact on people’s utility (health, happiness etc.), according to rational logic, should be essentially stationary in the long-run and dependent on the yearly average air quality. Following this logic, based on the classical random utility model, we should not expect the daily air quality to be a determining factor in a rational person’s valuation decision. Our results show, however, that people’s willingness to pay (WTP) is significantly and positively affected by the level of PM2.5 concentration, one of the key air pollution indicators that has been well understood for several years and is widely available on different media platforms for almost all large cities in China. We explored a range of rational explanations but found that our results were more consistent with the effects of psychological mechanisms, in particular, projection bias.