Re-examining empirical evidence on contingent valuation – Importance of incentive compatibility

The contingent valuation (CV) method uses respondents’ stated choices made in hypothetical situations to infer their preferences for environmental public goods. It enables the general public’s preferences to be stated in monetary terms and hence to estimate the economic value of a change in the quantity or quality of the goods. However, a key question remains regarding CV’s validity: do the value estimates obtained from a CV study reflect respondents’ true preferences and their maximum willingness to pay? Numerous empirical investigations have tested CV’s validity, but overall conclusions are mixed. We critically re-evaluate this evidence considering the issue of incentive compatibility in contingent valuation settings for which the necessary conditions were recently proposed by Carson and Groves (2007). Our analysis shows that once incentive compatibility conditions are considered, the available studies consistently show that the CV method is valid. As a result, we argue that contingent scenarios and elicitation formats must be made incentive compatible in order to observe consumers’ true preferences.