Valuation of Intangibles
Measuring the value of outcomes
(or social surplus)
• Two basic methods
– Revealed preference (observing what people actually do in
the market when price, quality and other attributes
change)
– Stated choice (asking what people would do in the market
under different prices, qualities and other attributes
change).
• Social surplus = #’s affected x marginal social benefit
(cost) of one unit
• Under perfect competition, P = MSC
• The intersection of marginal social benefit and
marginal social cost is the shadow price of the outcome
Market analogies
• Use the private sector price as if it were the proxy for the
price under perfect competition.
• This can be used as the shadow price for the publicly provided
good if the private price is what the users of the publicly
provided good would be willing to pay (if they could afford it).
• Targeting is an issue. If the publicly provided good (housing) is
provided to middle income residents, they would actually be
prepared to pay more and the estimated benefits of public
housing would increase
Trade-off
• Opportunity costs reflects trade-off inherent in choice.
• EG. Use of wages as a proxy for the value of time
– Wages do not include actual and psychic benefits of
working
– Taxes distort wages
– Some down time (travel) can be productive
– Travel time may have values
– Value of time depends on what else could be done
– Wages depend on institutional constraints – hours of work
are flexible
– Wages can reflect monopoly power
Value of statistical life
• Foregone earnings
– Courts often use discounted present value of
lifetime earnings to estimate values of limbs lost
and compensation for life.
– This assumes full-employment and that wage =
marginal social product. Those who are paid are
valued more than those who volunteer.
• Options include
– Purchase test (insurance)
– Wage premium accept increased risk of death
The prices and uptake in a comparable
community is used as the basis for
estimating a freely provided service in
the subject community.
The CS for the free pool is the area
under the demand curve
The revenue from the paid attendance
pool underestimates the consumer
surplus by a wide margin.
(p+w) ((life) - $300 = pV(life)
(p+w) ((life) - pV(life) = - $300
wV(life) = $300
V(life) = $300/w
W=1/10,000 - likelihood of death from
no airbags implies that the value of a
statistical life is $3 million
Problems with simple consumer
purchase and wage risk models
• Do workers have full information
• Adrenalin junkies may obtain non-wage
benefits (risk averse people may avoid
dangerous professions) – self-selection results
in a lower premium for dangerous work
• Risk of death data may not be complete
• Diminishing marginal utility for safety
• Assumption of market efficiency
Intermediate (secondary) market good
• Useful for training/education programs
– Compare incomes for those with and without training (training premium)
– Assumes that incomes accurately measure the benefits of training
– Some credentials may be overvalued (Harvard MBA?)
• Double counting (if the value is measured by reduced unemployment,
measuring increased earnings and combining the two double counts,
unless one measures the increased employment and increased wages as
an estimate of increased GDP – you cannot include both increased wages
and increased GDP or increased hours and increased GDP.
• The example the benefits of irrigation as the increase in area under the
demand curve for water and also measure increased revenues by farmers
is double counting.
• One advantage of having clients pay a portion of the costs for a social
program is that one more directly measures demand, which leads to direct
measures of consumer surplus.
Asset Valuation
• Use the discounted or capitalized value of capital
assets to track impacts
• This tracks valuations in secondary markets (land)
as a reflection of primary markets
(transportation)
• Natural experiments and using cross-sectional
studies to show asset price variation as a function
of a project/amenity are common.
• Land is the most common asset to use as
meaSure of the intangible
Hedonic pricing
•
•
Two step process to control for omitted variable and then to control for selfselection.
Require that the capital value of asset reflects changes in the attribute (e.g. travel
time to work is the attribute and the value of the house is the capital asset.
Step 1 – estimate the value of the house as a function of attributes
P = f(travel time, view, age, size, …..)
……… 1
this is the hedonic price function
……….2
P = B0travel timeB1viewB2ageB3sizeB4
……....3
ln= lnB0 +B1ln*time+B2ln*view+B3ln*age*B4ln*size…
……….4
•
B1,B2,B3, B4 are elasticities that show how a change in an attribute affects price
The hedonic price of an attribute is the change in price for a one unit change in
that attribute…
•
rv = B2 P/view
Hedonic Pricing – cont’d
Step 2 – we measure rv as a function of
the attribute of interest
rv = A0 + A1View + A2 Age + A3 income
Notice that rv varies with scenic view
level (this is the non-linear form of step
1).
Technically, rv should be a straight line
in the second graph according to the
equation above.
Value of statistical life - hedonics
ln (wage) = B0 + B1ln(fatality risk) + B2ln injury risk + b3ln(job tenure)… 1
rf = B1 wage/fatality risk
rf = A0 + A1(fatality risk) + A2(age) + A3(education) ……………………………….2
• Problems
–
–
–
–
People must understand the attribute in question(view, travel time, risk…)
The measurement of the variables (view, risk …) is important
The functional form is critical
Variation must exist in housing location, jobs …. to ensure proper
statistical fit
– Econometric issues in the data
– Assumption of efficient markets
Travel cost method
(recreation - parks)
• Assume that remote sites cost time and money to visit
• Willingness to incur these costs provide an estimate of
value
• Demand
q = f(price, prices, Y, Z)
Where q = number of trips to the park, price is the total cost, prices is the price of
substitutes, Y is income and Z is tastes.
• Key idea is that price varies depends on travel cost
(time) which varies for each individual)
• Often the model surveys visitors and uses zones (FSA)
to estimate costs