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Embedding a Field Experiment in Contingent Valuation to Measure Context-Dependent Risk Preferences: Does Prospect Theory Explain Individual Responses for Wildfire Risk?

  • Kimberly Rollins

    ()

    (Department of Resource Economics, University of Nevada, Reno)

  • Mimako Kobayashi

    ()

    (Department of Resource Economics, University of Nevada, Reno)

This 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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File URL: http://www.coba.unr.edu/econ/wp/papers/UNRECONWP10003.pdf
File Function: First version, 2010
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Paper 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.

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Length: 34 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:unr:wpaper:10-003
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  1. Mariam Lankoande & Jonathan Yoder, 2006. "An Econometric Model of Wildfire Suppression Productivity," Working Papers 2006-10, School of Economic Sciences, Washington State University.
  2. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  3. John Hey & Andrea Morone & Ulrich Schmidt, 2009. "Noise and bias in eliciting preferences," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235, December.
  4. Jindapon, Paan & Shaw, W. Douglass, 2008. "Option price without expected utility," Economics Letters, Elsevier, vol. 100(3), pages 408-410, September.
  5. Nguyen, Quang & Leung, PingSun, 2009. "Do Fishermen Have Different Attitudes Toward Risk? An Application of Prospect Theory to the Study of Vietnamese Fishermen," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(3), December.
  6. Wilcox, Nathaniel T., 2011. "'Stochastically more risk averse:' A contextual theory of stochastic discrete choice under risk," Journal of Econometrics, Elsevier, vol. 162(1), pages 89-104, May.
  7. Mary Riddel & W. Shaw, 2006. "A theoretically-consistent empirical model of non-expected utility: An application to nuclear-waste transport," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 131-150, March.
  8. Glenn Harrison & E. Rutström, 2009. "Expected utility theory and prospect theory: one wedding and a decent funeral," Experimental Economics, Springer, vol. 12(2), pages 133-158, June.
  9. Andrea Leiter & Gerald Pruckner, 2009. "Proportionality of Willingness to Pay to Small Changes in Risk: The Impact of Attitudinal Factors in Scope Tests," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(2), pages 169-186, February.
  10. Kobayashi, Mimako & Zirogiannis, Nikolaos & Rollins, Kimberly S. & Evans, M.D.R., 2010. "Estimating Private Incentives for Wildfire Risk Mitigation: Determinants of Demands for Different Fire-Safe Actions," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61867, Agricultural and Applied Economics Association.
  11. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
  12. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  13. David Bruner, 2009. "Changing the probability versus changing the reward," Experimental Economics, Springer, vol. 12(4), pages 367-385, December.
  14. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
  15. Shafran, Aric P., 2008. "Risk externalities and the problem of wildfire risk," Journal of Urban Economics, Elsevier, vol. 64(2), pages 488-495, September.
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