"Public-good valuation and intrafamily allocation"
2003/20: Strand, J. Department of Economics, The Ragnar Frisch Centre for Economic Research & HERO
(PDF 390 kb)
Picture: What is the household's willingness to pay (WTP) for a public good enjoyed by two household members? Do individual family members value such a good correctly on behalf of the household? In this paper, the author demonstrates that this is typically the case, under certain plausible assumptions.In this paper the author derives the value of marginal changes in a public good for two-person households, measured alternatively by one household member's (number i's) willingness to pay (WTP) for the good on behalf of the household, WTPi(H), or by the sum of individual WTP values for the two family members, WTP(C). Households are assumed to allocate their resources in efficient Nash bargains over one private good for each member, and one common household good. WTPi(H) is then found by trading off the public good against the household good, and WTP(C) by trading the public good off against the private goods. Strand shows that WTPi(H) is on average a correct representation of WTP(C), but is higher (lower) than this average when member 1 has a higher (lower) marginal public good value than member 2. Pure and paternalistic altruism (the latter attached to consumption of the public good) both move each member's WTP on behalf of the household closer to the true aggregate WTP, while only the paternalistic altruism raises aggregate WTP. These results have important implications for interpretation of results from contingent valuation surveys of public goods, hereunder health and environmental goods. In a large sample, individuals tend to represent households correctly on average when asked about household WTP, given that they answer truthfully, and given that the intra-family resource allocation is efficient. Counting all members' WTP answers on behalf of the household will then lead to double counting. ISBN 82-7756-128-8