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Under the microscope: dissection of a contingent valuation survey.

(Report)By Kristy E. Mathews | Summer, 2008

Appraisal Journal

ABSTRACT

Recently, appraisers and real estate economists have relied upon a survey-based method called contingent valuation (CV) as

an approach for estimating potential property value losses associated with environmental disamenities. This approach is notuniversally accepted. as some studies indicate that CV does not produce reliable estimates. This article, written from a survey

research and analysis perspective, provides a close inspection of a CV questionnaire and corresponding analysis. This

dissection reveals some concrete reasons why CV may not produce reliable results. The article concludes with suggestions for

future studies.

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During the last several years, appraisers and real estate economists have adopted a technique from natural resource

economics called contingent valuation (CV) to estimate the potential diminution in property values associated with

environmental disamenities. Contingent valuation is a survey-based approach that attempts to create a hypothetical market for

a good or service by constructing a scenario in which survey respondents indicate the amount of money they would pay to

hypothetically acquire the good or service described in the questionnaire. Policy makers and economists developed CV almost

50 years ago to measure the value of natural resource services for public policy decisions. (1) These services, such as a day of

recreational fishing on a public river, are not bought and sold in a market. As a result, the value of these nonmarket servicescannot be directly observed by looking at the behaviors of buyers and sellers.

The hypothetical nature of CV, called hypothetical bias, has long been recognized as one of its biggest limitations. (2) In effect,

the hypothetical nature of CV does not provide respondents with an incentive to reveal true values for natural resource services

because they do not have to bear the consequences of their answers. The survey responses are not actual commitments of

dollars for real purchases. If respondents make different choices in these hypothetical surveys than they would if faced with the

same scenario in real life, then CV results will not produce a reliable measure of value. The key question is whether

respondents' survey answers reflect their actual decisions and behaviors. In light of this hypothetical bias, natural resource

economists continue to debate the reliability of CV-based estimates of value. (3)

As applied to environmental effects and property value, the CV scenario typically instructs the respondents to suppose that the

residential properties have been contaminated. The survey then asks how much money respondents would be willing to pay for

the contaminated properties or how much they would pay to prevent or avoid the alleged contamination to the properties.

Alternatively, respondents may be asked how much money they would be willing to accept in exchange for ownership of theproperties. Researchers use the reported willingness to pay (WTP) or willingness to accept (WTA) to estimate any decrease in

the value of the home attributable to the alleged contamination.

Literature Review

Mundy and McLean (4) published one of the earliest studies using CV to estimate the decrease in property values in a litigation

setting. In that study, the respondents' hypothetical answers to CV questions reveal an average loss of 9%-15% for homes in a

North Tacoma, Washington, neighborhood potentially impacted by air emissions from an operating smelter.

Simons (5) uses multiple methods, including CV, to estimate the decrease in property value for residential property potentially

affected by PCBs in Anniston, Alabama. While the market-based methods in that study reveal a diminution of approximately

30%-60%, the CV survey results suggests a 95% loss in the value of the residential property. Jenkins-Smith et al. (6) use CV to

estimate the potential loss in property values associated with heavy metals in soils in neighborhoods adjacent to a closed

smelter in Corpus Christi, Texas. Their CV results indicate losses of about 30%. Simons and Throupe (7) use CV to estimatethe value impact of toxic mold on residential properties in South Carolina. Their CV results suggest an average loss of

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20%-57%. Simons and Winson-Geideman (8) use a CV survey in eight states to study the effects of leaking underground

storage tanks (LUSTs) on residential property values. Their CV results imply losses in property values of 19%-31%.

More recently, appraisers have criticized the use of CV as a valuation tool for properties that may be affected by environmental

disamenities. Wilson (9) provides a critique based on the National Oceanic and Atmospheric Administration (NOAA) Panel's

report on contingent valuation. (10) Following the 1989 Exxon Valdez oil spill, the State of Alaska filed a natural resource

damage (NRD) claim of almost $3 billion based on a CV study. (11) In conjunction with the Exxon Valdez NRD assessment,

several economists and researchers conducted empirical research on the reliability of the CV method in the early 1990s. (12)

This research prompted NOAA to convene a panel of survey researchers, economists, and psychologists to review theavailable evidence on CV and determine whether it could provide a reliable estimate of damages. The NOAA Panel's report

concluded that the hypothetical bias of CV surveys undermines the reliability of the results. Accordingly, the panel developed a

list of guidelines and standards for CV surveys to meet in order "to be the starting point" for damages. (13) Wilson's critique

details the findings of the NOAA Panel.

Roddewig and Frey (14) compare CV-based results to actual transaction prices to test the reliability of CV in estimating

property values. In four separate cities, CV studies were used to estimate the loss in property values attributed to various types

of environmental contamination. Roddewig and Frey then investigate actual transactions of properties within the same

geographic areas and compare the diminution, if any, in actual property values to the CV results. They find that not only does

CV overestimate the loss in property values attributed to environmental contamination, but in some cases predicts a loss when

actual transaction data reveals an increase in property values.

The current article is written from a survey research and economic analysis perspective, and continues the debate by providing

a dissection of a property-value CV questionnaire. The Wilson article provides some rationale for arguing against CV as amethodology, and the Roddewig and Frey article suggests some general reasons for the unreliability of CV in a property value

context. This article differs in that the dissection provides a hands-on, pragmatic review of the specific processes that CV

researchers use to generate a percentage reduction in property values associated with environmental contamination. This

close inspection of specific CV questions and analysis techniques provides a better understanding as to why, specifically, CV

may fail to generate reliable estimates of property value losses associated with environmental disamenities.

This article is organized as follows. The next section discusses the specific CV questions used in litigation-related surveys to

generate property value losses associated with alleged contamination. This is followed by an examination of key flaws in this

series of CV questions. Next, one of the key reliability tests endorsed by the NOAA Panel is described along with how the

representative questionnaire fails this key test. Finally, conclusions and suggestions for future studies are offered.

Examination of a CV Questionnaire

A CV questionnaire that has appeared in the published literature was selected and analyzed to identify specific problemsaffecting the reliability of CV surveys. The questionnaire, by Simons and Winson-Geideman, (15) was selected for several

reasons. First, a published article provides the exact wording of the key questions that the analysts use to estimate the

percentage decrease in property values while others do not. The actual wording of the questionnaire allows specific

identification of why these CV questions may not provide reliable estimates of property value losses. The actual wording also

allows identification of key information that is excluded from the questionnaire, which is equally as important in interpreting CV

results.

A second reason for examining this particular questionnaire is that the authors reveal some of the details of their analysis.

Understanding the specific methods and assumptions that the analysts use to construct loss estimates from CV survey

responses provides further insight into the results. Moreover, in this case, the authors indicate that their analysis technique

partly addresses the hypothetical bias inherent in CV responses.

Another reason to focus on this specific questionnaire is its widespread use. The authors indicate that more than 1,000

respondents across 8 states responded to these CV questions over a 3-year period. (16) Also, most of the CV data wascollected in conjunction with litigation. (17) Thus, this questionnaire has had the potential to influence litigation outcomes in the

past. To the extent that published questionnaires have a higher likelihood to be used in the future, this questionnaire may

influence future litigation outcomes as well.

CV Questionnaire Scenarios

In the CV questionnaire used by Simons and Winson-Geideman, the respondents to the telephone survey first hear the

following question:

To simplify later discussion, this scenario will be called the baseline scenario. The answers to this baseline question provide the

respondents' hypothetical offers for homes similar to theirs. The survey authors treat this result as the unimpaired value of the

hypothetical property, which can vary from person to person.

COPYRIGHT 2008 The Appraisal Institute Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited


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without permission.

Copyright 2008 Gale, Cengage Learning. All rights reserved. Gale Group is a Thomson Corporation Company.

NOTE: All illustrations and photos have been removed from this article.

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