Directional heterogeneity in WTP models for environmental valuation

Many studies in the stated preference literature on environmental valuation do not include the effects of substitutes and distance in willingness-to-pay (WTP) models, in spite of the relevance of these effects in aggregation and benefit transfer. Heterogeneity in the availability of substitutes over space may cause multidirectional distance effects in WTP. As a result, disregarding this spatial heterogeneity may lead to biased estimators of the distance effect and associated WTP values (Cameron, 2006). In this paper, we demonstrate that distance decay is subject to significant directional effects which tend to be related to differences in the availability of substitutes across the study area. We apply a straightforward methodology to account for such spatial heterogeneity in choice experiments and assess the effect on WTP for improvements in ecosystem services in a lake district. We model distance-decay effects, whilst controlling for heterogeneity between users and non-users and non-use related WTP reasons. The directional effects result in significantly different WTP estimates, different market sizes reflecting the population with positive WTP, and differences in total WTP up to 32%.

Research Highlights► We demonstrate that distance decay is subject to significant directional effects. ► These directional effects correspond with the heterogeneous spatial distribution of substitutes. ► The directional effects result in different WTP estimates and markets for water quality improvements.