International Choice Modelling Conference, International Choice Modelling Conference 2017

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ARE LABOUR TIME AND HARVEST A GOOD NUMERAIRE AS MONEY IN STATED PREFERENCE ELICITATION IN DEVELOPING COUNTRIES
Godwin Kofi Vondolia, Ståle Navrud

Last modified: 28 March 2017

Abstract


Yes, but stated preference elicitations in these non-monetary numéraires are more uncertain.

Many people make non-monetary payments each year to support such causes as environment and charity. Some examples of the use of non-monetary payments to promote environmental objectives are working-for-water programme in South Africa and Umugunda (i.e. National Cleaning Day) in Rwanda, National Sanitation Day in Ghana and dugnad (i.e. mobilization of collective efforts from community) in Norway. In addition to the environmental objectives, a number of insurance practitioners and academic literature are proposing in-kind insurance premiums to overcome the liquidity constraints on the purchase of insurance in climate change adaptation programmes (see e.g. Bals et al., 2006; Oxfam America, 2012).

According to general economic theory, these non-monetary payments should be convertible into money. For instance, the human capital theory of Becker (1965) assumes a perfect convertibility between money and labour time. However, the numéraire adopted in environmental project evaluation depends on the context (Brekke, 1997; Dreze, 1998).  Specifically, Brekke (1997) indicates that the choice of numéraire matters in the evaluation of public goods provision but not in the purchase of private goods. This is because the choice of numéraires requires normalization of both prices and marginal utility; and the double normalization renders the (ir)relevance of the choice of numéraires to be a context-dependent (Brekke, 1997). Furthermore, the adoption of a particular numéraire in cost-benefit analysis framework has been noted to benefit some groups of people but not favourable to other people (Brekke, 1997). In addition, Dreze (1998) clarifies further that conditions under which the marginal rate of substitution between two private goods may differ e.g. rationing and market segmentation. These same conditions render the choice of numéraire to be of consequence for the purchase of private goods as well.

Furthermore, a consistent finding from stated preferences studies conducted in developing countries using non-monetary payments modes is that respondents are more likely to state a positive willingness to pay (WTP) under these non-monetary payment modes as compared to monetary elicitation of preferences. Experiences with payment vehicles have been found to contribute to the differences in preferences under alternative payment modes (Vondolia, et al., 2014). In addition, stated preference studies in developing countries report that the respondents have high preference for contributing non-monetary payments such as time than money (see e.g. Whittington et al., 1990). The main purpose of the present paper is to assess certainties in and convertibility between the use of monetary and non-monetary payments (i.e. labour time and harvests) in choice experiments on the purchase of catastrophic flood risk insurance, a private good, in a developing country.  Specifically, we present evidence from choice experiments on demand for catastrophic flood risk insurance in which the insurance premiums are required in monetary, labour time and harvests among commercial smallholder farmers. We test for differences in scale parameters in choice experiments using three different payment vehicles and convertibility between of labour time and money and harvests and money.

Using an integrated random-parameter error components model, we found two important results. First, we found that non-monetary welfare measures are convertible into monetary welfare measures. The marginal rates of substitution (i.e. marginal willingness-to-pay values) between non-monetary insurance premiums and monetary premiums are statistically significant. Secondly, we found that responses under both non-monetary stated preference elicitations are more uncertain relative to monetary stated preference elicitation. Specifically, responses under non-monetary stated preferences elicitation are noisier for both labour time and harvest relative to responses under monetary stated preference elicitation.

Both findings provide suggestions on the use of stated preferences elicited under non-monetary payment modes in project evaluation and stated preferences surveys. The findings of the present study suggest that welfare estimates obtained in non-monetary numeraires are convertible into monetary welfare measure. The findings also support calls for additional measures in survey design and implementation to address the sources of uncertainties surrounding the use of non-monetary numeraires in stated preference elicitation. In addition, the present study also presents willingness to pay values for insurance coverage and flood return period for catastrophic flood risk insurance in a developing country.

References

Bals, C., K. Warner and S. Butzengeiger, 2006. Insuring the uninsurable: design options for a climate change funding mechanism. Climate Policy 6 (6): 637 – 647.

Becker, G. S., 1965. A theory of the allocation of time. Economic Journal 75: 493 – 517.

Brekke, K. A., 1997. The numéraires matters in cost-benefit analysis. Journal of Public Economics 64: 117 – 123.

Dreze, J., 1998. Distribution matters in cost-benefit analysis: Comment on K. A. Brekke. Journal of Public Economics 70: 485 – 488.

Oxfam America, 2012. Horn of Africa Risk Transfer for Adaptation. Boston: Oxfam America.

Vondolia, G. K., H. Eggert, S. Navrud and J. Stage, 2014. What do respondents bring to Contingent Valuation? A Comparison of monetary and labour payment vehicles. Journal of Environmental Economics and Policy 3 (3): 253 - 267.

Whittington, D., X. Mu and R. Roche, 1990. Calculating the value of time spent collecting water: some estimates for Ukunda, Kenya. World Development 18 (2): 269 – 280.

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