Scandinavian Working Papers in Economics

HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

No 2003:20: Public-good valuation and intrafamily allocation

Jon Strand ()
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Jon Strand: Department of Economics, Postal: University of Oslo, P.O. Box 1005 Blindern, NO-0317 Oslo, Norway

Abstract: I derive the value of marginal changes in a public good for two-person households, measured alternatively by household member i’s willingness to pay (WTP) for the good on behalf of the household, WTPi(H), or by the sum of individual WTP values across 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. I show 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 latter raises aggregate WTP. The results have important implications for interpretation of results from contingent valuation surveys of public-goods. In a large sample, individuals tend to represent households correctly on average when asked about household WTP, and counting all members’ WTP answers on behalf of the household will lead to double counting.

Keywords: Public goods; willingness to pay; contingent valuation; intrafamily allocation; Nash bargaining

JEL-codes: D13; D64; H41; Q26

27 pages, June 22, 2009

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