WEAI/AERE 2012 - Individual Paper Abstract
Title: Reclaimed Wastewater, WTP, and Endogenous Free-Riding Beliefs
Author(s): Diane DUPONT, Department of Economics, Brock University, 500 Glenridge Avenue, St. Catharines, Ontario, L2S 3A1, Canada, 905-688-5550 x3129, 905-688-6388, diane.dupont at brocku dot ca [Photo credit: Diane Dupont]
Abstract:
Climate change may cause more frequent seasonal water shortages. Water-scarce countries like Australia already use reclaimed household wastewater for subsequent uses that do not require potable water. However, views on the degree of acceptability of reusing wastewater and a lack of trust in water utilities have deterred countries like Canada, the United States, and the United Kingdom from adopting these technologies, even though they can assist in alleviating increasing instances of summer water shortages.
This paper reports on results from a 2009 Canadian Internet-based contingent valuation study. Two water management programs were presented: a program to reduce summer water use through mandatory water restrictions and a program that would allow citizens to avoid summer water restrictions through the use of reclaimed household wastewater. The paper estimates the willingness-to-pay (WTP) for the second program and finds trust in the water utility, belief in future drought conditions, and age to be important factors, as is the belief that members of one's community will not voluntarily reduce water use by the required amount.
The latter finding introduces a potential endogeneity bias in responses to discrete choice WTP questions. A second recursive or multi-stage process model is estimated to account for this. It is assumed that the respondent's belief in free riding behaviour of others is a determinant of her true WTP, however, the converse is not true. The two equations in the mixed process model are a probit and an interval censored equation. The first equation specifies the existence of an unobserved latent variable that describes a respondent's belief in other's free riding behaviour, while the second equation describes the underlying WTP within a double-bounded framework that incorporates endogenous free-riding beliefs.
The paper contributes to the literature on valuing the avoidance of water restrictions, elicitation of free riding beliefs, and the use of endogenous regressors in discrete choice models.