Combining Stated Choice Methods and Hedonic Valuation: Measuring the Economic Benefits from Protecting the Business Activities from High Water in Venice.

Combining Stated Choice Methods and Hedonic Valuation: Measuring the Economic Benefits from Protecting the Business Activities from High Water in Venice

EAERE 2004 Meeting (Budapeste)

Paulo A.L.D. NunesUniversity Ca’ Foscari of Venice

Fondazione Eni Enrico MatteiJohns Hopkins University, Bologna Centre

2

Table of contents

Economic valuation of the damages attributable to high water, with special focus on:

Economic activities located on the ground floor of the historical centre of Venice

Short term impacts (structural changes of the city in the long period are not considered), in particular:

structural damages economic damages

3

High water in Venezia: some data

(Comune di Venezia http://www.comune.venezia.it/maree)

4

Venezia: 4 Novembre 1966

(by Comune di Veneziahttp://www.comune.venezia.it/maree)

5

Venezia: 4 Novembre 1966

(Comune di Venezia: http://www.comune.venezia.it/maree)

6

High water in Venezia: intertemporal trend

(Comune di Venezia: http://www.comune.venezia.it/maree)

7

Objectives

Economic valuation of the damages due to high water in Venice, focusing on:

Economic activities located on the ground floor – important stakeholder in the Venetian institutional setting;

Short term impacts, valuation study is anchored on the present number and distribution of economic activities located in Venice, excluding any supplementary impact(s) that the high water can cause on a future mapping of the business activities.

8

Damages due to high water On-site structural damages

(fully market priced -- private insurance perspective)– damages attributable to the infiltration of water (structures

and materials: maintenance and substitution of doors, maintenance and cleaning of pavements, and maintenance of walls) as well as costs supported by the business activities for mitigation (e.g. raising of the pavements, hydraulic pumps, bulkhead)

Off-site economic damages (not fully market priced -- public protection perspective)– damages attributable to the reduced overall functioning of

the city dynamics during high water (logistic problems, supplying problems, difficulties in accessing the business, reduction of the customer flow)Reflected on uncertainty wrt future revenues of the

business activities, which has an impact (reduction) of the economic value of the business activities

9

Database

Census on all business activities that are located and operating on the city of Venice -- ground floor (COSES, total of 5097 observations)

For the study, respondents were selected on the basis of their complete answers with respect to:

– The level of flooding

– Structural damages

Total number of observations: 2598

10

Distribution of types of activity located at the ground floor

Type of activity Frequency Percentage Industry 297 11.4 Shops 1518 58.4 Bars and restaurants 422 16.2 Offices 154 5.9 Hotels 116 4.5 Other 91 3.5 Total 2598 100.0

11

Level of flooding (COSES)

Osservazioni

0

50

100

150

200

250

300

350

400

450

500

80 90 97 103 108 115 120 125 130 135 140 145 150 170

19.2%

48.3%

99.7%

12

Business activity: Respondents Percentage

With high water protection 944 36,3%

Without high water protection 1645 63,3%

No answer 9 0,3%

Total 2 598 100%

Rialzo Paratia Vasca Pompa

37,20% 39,80% 7,80% 15,20%

13

High water protection measures: paratie

14

High water protection measures: vasca

15

High water protection measures: taglio delle mura

16

GoalGoal

Monetary valuation of off-site economic damages due to high water on the productive activities located and working in Venice -- since it refers to damage component that are not fully captured by market prices.

Valuation strategy: development and application of a survey instrument that is anchored on the use of an economic valuation exercise -- portrayed in terms of a quasi-stated choice valuation method.

17

Consumer choice model

1) Each business activity is described by a set of characteristics (objectively measured)

z = (z1, ..., zn)

2) Consumer preferences are described by an utility function

U = (x, z1, ..., zn)

3) Consumer budget constraint

y = x + bwhere b represents the individual’s valuation of

an economic activity

18

Consumer choice model (cont.)4) To stress the essential spatial context with respect to the choice of

the business activity, we define b according

U (y – b, z11, z2

1, z31) = U (y, z1

0, z20, z3

0)

where (z11, z2

1, z31) and (z1

0, z20, z3

0) denote two alternative

characteristics’ packages

Furthermore, since we admit that consumers’ preferences are depicted in the characteristics space dimension and disclosed in the market, we will be interested in estimating the implicit marginal valuation that the consumer places on the different characteristics under consideration – represented by βs in Equation (1). If we admit a linear, additive relationship between b and characteristics, we will estimate

b = β0 + β1 * z1 + β2 * z2 + β3 * z3 + ε

(1)

We propose to estimate Equation (1) with the development of a survey that allows us to have direct information with respect to consumer choices regarding alternative characteristic packages – Equation (1) is therefore interpreted as a quasi-hedonic function.

We propose to estimate Equation (1) with the development of a survey that allows us to have direct information with respect to consumer choices regarding alternative characteristic packages – Equation (1) is therefore interpreted as a quasi-hedonic function.

19

Instrument surveyInstrument survey

Preliminary considerations– Sampling (about 1000 interviews)– Face to face interviews

Construction of the questionnaire– Valuation questions – Structure of the questionnaire

Pre-test of the questionnaire– Focus groups

Final version of the questionnaire

20

QuestionnaireQuestionnaire:: economic valuation exercise

Valuation of the damage due to the extreme high water event of the 16th Novembre, 2002

Valuation of the damage due to a continued series of small high water events over a period of one week

Economic valuation exercise: quasi-stated choice questionnaire

21

Supponga un’attività economica (A) analoga alla Sua, situata nel centro storico di Venezia, il cui valore di mercato dipende dalle caratteristiche

indicate nella scheda.

Confronti l’attività economica (A) con l’attività economica (B), sempre analoga alla Sua, ma con alcune caratteristiche diverse.

Vorremmo proporle ora un esercizio di valutazione economica:

Secondo lei, l’attività (B) vale di più, di meno o ha lo stesso valore dell’attività (A)?

Indichi in quale percentuale il valore dell’attività (B) è maggiore o minore rispetto al valore dell’attività (A).

Valuation exerciseValuation exercise

22

Valuation exerciseValuation exercise

Tabella 7.2. Esercizio di valutazione del tipo conjoint choice

Attributi Attività: A Attività: B

Livello di marea a cui l’acqua alta entra nei suoi locali senza protezioni

Da quota 110 cm Da quota 130 cm

Zona di Venezia frequentata da: Prevalentemente turisti Prevalentemente turisti

La sua attività può essere raggiunta con le passerelle

Si Si

Valore dell’attività 800.000 EURO

Var % positiva

0

Var % negativa

0

Var % nulla

0

Di quanto? ______%

Di quanto?

______%

Objective:

Comparison between 2 alternative economic activities, defined by a number of attributes or characteristics

Objective:

Comparison between 2 alternative economic activities, defined by a number of attributes or characteristicsValuation mechanism:

1) The respondent has to choose between activity A and activity B

2) The respondent has to assign the value variation in percentage attributable to activity B with respect to activity A

Valuation mechanism:

1) The respondent has to choose between activity A and activity B

2) The respondent has to assign the value variation in percentage attributable to activity B with respect to activity A

23

Attributes and levelsAttributes and levels

Flooding level at which the water enters the locals without using protection devices:

90 cm; 110 cm; 130 cm; 145 cm

Area of Venice that is attended by: mainly tourists

mainly residents

tourists and residents

Possibility to reach the activity with the passerelle: YES

NO

Value of the economic activity: from 200.000 Euro to 2.000.000 Euro

24

Estimation resultsEstimation results

25

Main effect model (only Main effect model (only zzii))Main effect model formulation (split sample – location)

All

Work with tourists (a)

Work mainly with tourists

(b)

Located above

the quota of 110 cm

Located above 110 cm and work

mainly with residents (c)

Constant -44 659.0*** -35 545.1*** -42 605.1*** -48 215.4** -50 159.6***

-6.569 -3.333 -3.361 -6.595 -5.598

Quota wrt sea level (cm) 6 090.7*** 5 920.2*** 6 119.4*** 6 074.4*** 6 005.5***

33.227 20.617 17.743 30.904 25.088

Catwalks (dummy) 13 922.5** 17 442.8* 23 241.2* 17 459.7** 18 316.1**

1.757 1.460 1.576 2.070 1.704

Mainly residents -86 455.1*** -165 541.0*** -173 285.0*** -62 616.5*** 1 287.1

-6.281 -7.922 -6.989 -4.247 0.070

Mainly tourists 57 724.5*** 89 924.8*** 130 917.0*** 45 142.8*** 2 947.0 3.820 4.113 5.109 2.727 0.134 N obs. 2 196 1 074 778 1 756 924 Adjusted R-squared 0.419 0.416 0.412 0.431 0.461 Log-L -29 790.2 -14 615.9 -10 606.7 -23 755.1 -12 415.2 Restriction Log-L -30 388.6 -14 907.9 -10 816.6 -24 251.8 -12 702.5

Notes: ***, **, * mean that the parameter estimate is statistically different from zero at 99%, 95% and 90% confidence level, respectively. (a) According to respondent’s answers, tourists represent at least 40% of their total costumers. (b) According to respondent’s answers, tourists represent at least 60% of their total costumers. (c) According to respondent’s answers, residents represent at least 60% of their total costumers.

26

Main effect model formulation (split sample – type of business activity)

Table 7. Multivariate analysis of the bid function (according to the official classification of the economic activities in Venice)

Industry

Food, cigarrets, newspaper, drinks

Cloth/fashion shops

Other retail shops Hotels

Bars and restaurants

Offices of liberal jobs Banks

Constant -45 717.5** -68 629.0*** -49 488.9*** -45 310.3*** -68 137.1*** -35 726.9*** 29 754.3 2432.8 -2.299 -3.490 -2.445 -4.211 -1.494 -2.466 0.606 0.074 Quota wrt sea level (cm) 6 038.0*** 6 441.1*** 5 638.3*** 6 077.8*** 9 807.5*** 5 864.7*** 3 379.0*** 4154.4*** 11.691 12.607 10.710 20.156 7.634 15.534 2.410 4.121 Catwalks (dummy) 429.1 26 905.6 -744.3 12 767.1 79 647.4* 14 428.2 29 674.6 37135.1 0.019 1.198 -0.036 0.984 1.448 0.840 0.674 0.702 Mainly residents -12 318.4 40 095.2 -8 2316.1** -61 680.5*** -36 5409.0** -130 743.0*** -27 2281.0*** -173 205.0** -0.300 1.039 -2.159 -2.740 -3.675 -4.720 -2.810 -2.128 Mainly tourists 78 862.7* 42 406.2 144 221.0** 68 631.6*** 136 020.0* 26 247.5 -137 173.0 9 111.8 1.608 0.973 3.178 3.029 1.530 0.778 -0.989 0.108 N obs. 235 209 264 782 140 387 40 42 Adjusted R-squared 0.428 0.460 0.419 0.411 0.429 0.496 0.505 0.350 Log-L -3165.458 -2803.143 -3566.220 -10571.527 -1967.449 -5210.831 -535.084 -557.640 Restriction Log-L -3233.147 -2869.584 -3639.915 -10780.793 -2008.717 -5345.417 -551.299 -568.839

Constant Quota wrt sea level (cm) Catwalks (dummy)

Mainly residents Mainly tourists N obs. Adjusted R-squared Log-L Restriction Log-L

27

All sample

No stress With stress

Constant -32 926.6*** -11 039.6 -4.286 -0.581 Quota wrt sea level (cm) 9 754.4*** 8 743.5*** 19.720 13.251 Quota wrt sea level (cm2) -104.2*** -105.3*** -8.915 -9.009

Catwalks (dummy) 49 723.1*** 81 758.5*** 3.710 3.557 Mainly residents -109 634.0*** -10 2609.0*** -7.254 -3.459 Mainly tourists 45 577.5** -18 212.4 2.329 -0.509 Cm * Mainly residents -2 024.41** -1 917.0** -2.185 -2.071 Catwalks * Mainly residents -12 109.1*** -12 546.2*** -3.088 -3.200 Cm * Mainly tourists -1 653.1 -1 727.4 -1.275 -1.334 Catwalks * Mainly tourists 5 593.5 12563.400 0.029 0.067 Cm * Catwalks -1 851.2*** -1846.530*** -4.776 -4.761 Stress -- -25 685.8* -1.297 Stress * Cm -- 1 186.6** 2.316 Stress * Catwalks -- -36 953.4** -1.714 Stress * Mainly residents -- -9 719.0

-0.322 Stress * Mainly tourists -- 71 138.7** 2.145 N obs. 2 196 2 196 Adjusted R-squared 0.439 0.441 Log-L -29 747.2 -29 741.8 Restriction Log-L -30 388.6 -30 388.6

Fu

ll c

ross

eff

ect

mo

del

sp

ecif

icat

ion

28

Summary

Given the non-market nature of the indirect damages, we propose to work with a survey valuation approach, adapting state-of-the-art non-market valuation methods to the Venetian context.

We develop a valuation methodology that combines both the use of a stated choice questionnaire with hedonic pricing.

We proceed with the estimation of the quasi-hedonic valuation function, assessing the marginal impact of the different characteristics under consideration, including (1) the spatial position of the business activity with respect to the sea level; (2) whether the shop, and its neighborhood, is accessible by a catwalk; (3) and the type of neighborhood where the business activity is located.

29

Conclusions

Estimation results show that the marginal willingness to pay for having a business activity in a higher quota with respect to the sea level is ranges from 6 000 Euro to 9 000 Euro, which is robust to alternative empirical model specifications.

Such an estimate is smaller whenever the valuation exercise also includes the existence of catwalks, which can be interpreted as disclosing a potential substitution in the valuation across the two characteristics.

The marginal WTP for the catwalks reveals to be positive and its estimate magnitude stronger among the business activities that works with tourists.

30

Conclusions

Finally, the marginal valuation of business activities that are described in the survey as ‘working mainly with tourists’ is stronger among the business activities that currently already work with a great deal of tourists, including hotels and fashion/cloths shops.

– This signals a clear trend for specialization in the areas of the city of Venice with the highest presence of tourists, such as San Marco and Rialto district areas, towards economic activities exclusively tailored for tourists, bringing along with it a loss in the social diversity in the historical center of Venice.

31

Campo S. Maria Formosa30122 Venezia - Italy

tel +39 | 041 | 27 11 400fax +39 | 041 | 27 11 461web http://www.feem.it

Contact:

[email protected]