Contingent Valuation Method

How much would you be willing to pay for a cancer treatment with a 2% chance of working?  How much would you be willing to spend for a new vaccine that was as effective as a prior vaccine, but was now available in chewable tablets?  One way to answer questions regarding new products or goods where markets don’t exist is to use the contingent valuation method (CVM).  In general, CVM is a survey which presents individuals with a hypothetical situation and solicits these individuals for a value of how much they would be willing to pay (WTP) for the good in question.  CVM was orginially used to value environmental laws changes as well as new urban transportation systems.  On of individuals at the forefront of this field is Richard Carson, an economist at UC-San Diego. 

In a 1999 Health Policy article, Thmoas Klose analyses CVM in the medical field.  Below are different CVM methodologies:

  • Open-Ended: Here a person is asked a general question of how much they would be willing to pay for the good.  In practice, however, these questions often lead to very inaccurate responses.
  • Take-it or Leave-it (TIOLI):  In this method, an individual is presented with an option of paying $X for the good.  The benefit here is that the survey participant is faced with a concrete decision.  On the negative side, it often takes a large sample size to achieve accurate estimates.
  • Bidding Games: Using a computer, a survey participant will be asked a question as in the TIOLI situation.  If they answer ‘yes’ to a WTP of $X, subsequent questions will ask if the individual would be willing to pay $Y for the good where Y>X.  If the answer to the TIOLI question in the first stage is ‘no’, then subsequent questions will ask the individual wold pay $Z for the good where ZStarting point bias (the amount $X may be seen as a ‘reasonable’ amount by the individual and they may offer an inaccurate WTP) can cause problems.
  • Check box: This is similar to an open ended question, but individuals get to check a box which corresponds to the maximum they would be willing to pay for the good.  This method has the problem of range bias, where respondents tend to pick values in the middle of the range of boxes.

There are two other important biases to note which I did not mention above.  The first is question order bias.  Some people will offer a high WTP when question are in a certain order, but when the order changes their WTP may also change.  There may be suggestive elements in the wording of the question which may cause a problem.  Also, response effects need to be taken into account.  Response effects occur if an individual answers a question strategically.  For instance, someone with cancer may answer ‘$10m’ to the question ‘How much would you be willing to pay for a cancer treatment with a 2% chance of working?’, because they believe this would influence drug companies to produce the treatment.

Another issue to take into account is the payment method.  Is the person paying for the treatment through a co-pay, through increases in insurance premiums in order to cover the treatment, or through increased taxes?  Also, what is the timing of the payment.  Is it ex-ante (before they get a disease), intermediate (in the diagnosis stage) or ex-post (after they already have the disease)? 

CVM is a very useful tool, but one that must be used with caution.  Careful design is imperative in order to be able to reach valid conclusions from a CVM survey. 

  • Klose (1999); “The contingent valuation method in health care” Health Policy, Vol 49, pp. 97-112.

Other articles of interest regarding CVM in the medical field:

  • Popper, Carol (1990); “Contingent Valuation of time spent on NHS waiting lists,” The Economic Journal, Vol 100(400), pp. 193-199.
  • Diener, O’Brien, Gafni (1998); “Health care contingent valuation studies: a review and classification of the literature,” Health Economics, Vol 7, pp. 313-326.