Examining the income-effect in contingent valuation -The importance of making the right choices

This paper focuses on three important issues in estimating the relationship between WTP and income using contingent valuation: 1) the choice of income measure; 2) the modelling choice; and 3) the social context. Addressing the first two issues, a sensitivity analysis is performed. The results show that the estimated income-elasticity of WTP is fairly sensitive to different income measures and modelling assumptions and varies between 0.07 and 0.49 for the specific models estimated. The main conclusion drawn from the analysis is that inclusion of control variables for household characteristics is important for finding a significant income-effect, when the household income measure is used. No significant difference is found between gross or net income. The results further indicate that the relevant income measure may not only be the income level per se, but also the income level relative to others. The latter result is based on an experimental valuation question, conditioning the respondents on hypothetical changes in their absolute and relative income. The conclusion is that the social context read into the valuation situation influences the responses and, therefore, the estimated welfare measure.