Embedding a Field Experiment in Contingent Valuation to Measure Context-Dependent Risk Preferences: Does Prospect Theory Explain Individual Responses for Wildfire Risk?
AbstractThis paper contributes towards the development of an empirical approach applicable to contingent valuation to accommodate non-expected utility risk preferences. Combining elicitation approaches used in field experiments with contingent valuation, we embed an experimental design that systematically varies probabilities and losses across a survey sample in a willingness to pay elicitation format. We apply the proposed elicitation and estimation approaches to estimate the risk preferences of a representative homeowner who faces probabilistic wildfire risks and an investment option that reduces losses due to wildfire. Based on prospect theory, we estimate parameters of probability weighting, risk preferences and use individual characteristics as covariates for these parameters and as utility shifters. We find that risk preferences are consistent with prospect theory. We find that probability weighting may offer an explanation for respondents’ observed under investment in measures to reduce losses due to wildfire.
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Bibliographic InfoPaper provided by University of Nevada, Reno, Department of Economics & University of Nevada, Reno , Department of Resource Economics in its series Working Papers with number 10-003.
Length: 34 pages
Date of creation: May 2010
Date of revision:
Prospect theory; Contingent valuation; Field experiment; Wildfire risk;
Find related papers by JEL classification:
- Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-18 (All new papers)
- NEP-CBE-2010-06-18 (Cognitive & Behavioural Economics)
- NEP-EXP-2010-06-18 (Experimental Economics)
- NEP-IAS-2010-06-18 (Insurance Economics)
- NEP-UPT-2010-06-18 (Utility Models & Prospect Theory)
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