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The endogeneity of one’s preferences is observed when the context exerts an influence on one’s monetary bids through the bids of other actors involved. When monetary bids are forthcoming, the phenomenon of strategic bias is observed where some respondents bid values in situ not (just) due to their appraisal of the good or service in question but also their expectations of other respondents’ WTP; which is characteristic of “free-rider” situations (Pearce and Moran, 1994: 50, 52-53;

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Kriström, 1999: 784-785; Gilpin, 2000: 195; Hufschmidt et al, 1983: 253; Madhoo, 2010: 41; Tietenberg and Lewis, 2012: 83; Perman et al, 2011: 425; Hanley et al, 2007: 341; Grafton et al, 2004: 259; Al-Kandari, 1994: 374). Paul Samuelson (1954: 387-389) was the first to mention the risk of strategic bias when using surveys to elicit responses. However, free-riding as a problem can be traced back to Hume, Hobbes and Rousseau who were among the first scholars to address it (Dougherty, 2003: 240, 250). Strategic bias suggests that environmental goods and services possess an interdependency quality that stems from its public good character. Public good has two features. Non-rivalry is one feature that generates interdependence as consuming it does not decrease the supply for others to consume (i.e. “joint consumption”). Non-excludability as the second feature creates the risk of free-riding as agents can use a resource without paying for it which increases other actors’ costs of paying for the resource; this in turn decreases the latters’ willingness to contribute to the joint provision of the resource (Paavola and Adger, 2005: 356).

Some explanations have been proposed to explain this disparity—as opposed to uniformity—in valuation bids across individuals for jointly-provided environmental goods and services. One explanation is the relative income hypothesis which posits that it is not necessarily that non- satiation in terms of having more of a good as proxied by one’s income necessarily equates with greater satisfaction, “utility” or “happiness”. This is because individuals vie for status goods to distinguish themselves from the rest of the population (Sagoff, 2007: 75-76; Spash, 2011: 359). People’s relative incomes affect how they value the environment through paying less or none at all believing that others who are richer should “bear the burden” by paying more as their ‘fair share’ as experiments on primates suggest (Gowdy, 2008: 636). Gowdy (2008: 641) suggests that people would be more inclined to pay more if they obtain public recognition for their contribution.

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Spash (2011: 359) submits that an individual’s pleasure, however defined, cannot be divorced from his/her social context as to divorce it is to treat homo sapiens as hedonists and deny the “human potential and richness of human relationships”, or the “uniqueness” of humans as “highly intelligent social animals” as Gowdy (2008: 636) puts it. Several scholars contend that human beings cannot be reduced to the “economic man” or homo economicus as neoclassical economics has been accused of. Siebenhüner (2000: 17, 18) argues that it is not that homo economicus is necessarily an egoist or a utility maximising consumer in Söderbaum’s (1999: 164) and Nyborg’s (2000: 305) views. This is because they may have preferences for “social states” beyond their “consumption preferences” as Arrow (1963: 17f) demonstrates, but that homo economicus cannot be assumed to have an interest in sustainable development as he/she gains nothing from it. In fact, their interests in common welfare (e.g. democracy, sustainable development) can ironically lead to “suboptimal and critical” outcomes, such as growth of government bureaucracy and greater inefficiency in the welfare state (Faber et al, 2002: 325). This is because homo economicus should not abide by fixed rules (Faber et al, 2002: 324) but be opportunistic and calculative in order to maximise personal welfare (i.e. “welfare optima”) via market exchange (Debreu, 1959).

Suboptimal and critical outcomes are actually observed when money is used to induce desired behaviors which can ironically reduce cooperative behavior by crowding out such behavior as individuals are primed to act in more self-interested ways in order to reduce their dependency on others as well as wanting others not to depend on them (Gowdy, 2008: 635). That experiments on human behavior have shown that it is impossible for human beings to abandon their proclivity to bargain such as sharing in ultimatum games suggests reciprocity as experimental evidence (Gintis, 2000: 319), but also that the homo economicus model of human behavior is neither deterministic

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nor definitive as the only model of human behavior (Faber et al, 2002: 325). In fact, Gowdy (2008: 637) ventures that human behavior is “culturally conditioned” by rewards and punishments that is dictated by social (i.e. cultural or institutional) norms, notwithstanding that such norms vary across societies and can conflict with other norms. As a corollary, incentives from environmental conservation (e.g. reduction in costs to businesses or pricing future costs and benefits to future generations to achieve “competitive equilibrium”) are also culturally (institutionally) determined by adhering to social norms (Gowdy, 2008: 639). Gowdy (2008: 639-640) sees that consumerism and materialism have culturally conditioned human behavior to attain “social status through conspicuous consumption” but argues that this pattern of behavour is no more “natural” than the other myriad patterns in history. Thus, to ensure interpersonal cooperation given the global scale of climate change, Gowdy (2008: 641, 642) advocates fostering interpersonal trust in cooperative institutions, punishment of free-riders, payment of “fair share” (e.g. taxing rich countries to transfer money and technology to give to poor countries) and embracing others as fellow citizens. However, mainstream economists such as Shogren (2012: 355-356) argue it will be difficult for the policymaker to design a mechanism based on who is susceptible to effects of crowding out “willingness to do the good deed” or individuals who are intrinsically motivated to conserve the environment, and likewise those who are susceptible to the effects of “crowding in” efforts to do good deeds or who possess an extrinsic motivation (e.g. monetary rewards) to protect the environment. Shogren (2012: 356) concludes that the interaction between intrinsic and extrinsic motivations matter to environmental policy.

Strategic interdependent behavior is also influenced by the choice of policy instruments such that interpersonal trust and reciprocity may be as important as individual rationality and strategic

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behavior in explaining outcomes, with normative motivations playing a parallel, crucial role in influencing individuals (Vatn, 2005a: 212). Reciprocity, or “a reciprocal relation”, can be defined as “a series of bidirectional transfers, independent of one another yet interconnected. Since independence here implies that each transfer is in itself voluntary; thus a transfer from one side is reciprocated by another from the opposite side. Therefore, by analogy, a reciprocal relation is one that takes “an intermediate position between market exchange and pure altruism”” (Zamagni, 2004: 19). The policy instrument takes the form of payment mechanism such as an income tax or a trust fund, and is influenced by the institutional arrangement which administers the payment mechanism, such as a government or charity (Spash, 2002: 668-669). Thus, besides one’s perceptions of any change to the natural environment, the payment mechanism can also account for framing effects which may arise from the absence of a psychological anchor for individuals to measure changes in the environmental good or service (Spash, 2002: 668-669). Together with the task factors that are general characteristics of a decision problem (e.g. number of alternatives) and context factors that describe differences among these alternatives (e.g. similarity of alternatives) that Payne et al (1992: 108, 129-130) mention, the policy instrument can influence how alternatives are framed, i.e. presented, to the decision-maker.

The policy instrument is important not because it may affect one’s preferences for framing effects may have “nothing to do” with preferences as scholars such as Vriend (1996: 275) allege, but because “opportunities may be perceived differently when the choice is framed differently” even for the same individual who applies the same preferences for different policy instruments such as different payment mechanisms, e.g. tax or donation (Vriend, 1996: 275). In short, the policy instrument affects how one expresses one’s pre-existing preferences when affected by framing

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effects (Alevy et al, 2011: 375), such that framing effects can lead to violations of axioms of invariance, dominance, independence and transitivity as have been observed (Vriend, 1996: 275). The typical method to overcome the problem of strategic bids is to remove them (or “laundered out”) before calculating welfare benefits and costs of the project based on the retained responses, as are protest responses which are outlier monetary bids submitted not as intended bids but as expression of one’s opposition to monetising the environment (Willis et al, 1996: 390; O’Neill, 2001: 1866; Ludwig, 2000: 34). Christian Becker (2006: 18) argues that this exclusion of protest bids and strategic responses is unfair as the “crucial question” is not whether the conception of the human being as homo economicus can be disproved as it is a “construct” or “abstraction”, but whether homo economicus can be adopted as a “suitable” construct and if not, whether other alternative conceptions of the human being might be possible. Becker (2006: 19) implies the latter by drawing evidence from modern biology, psychology and experimental economics to demonstrate the interdependent nature of human beings. Instead, Becker (2006: 19) advocates for a homo ecologicus conception of the human being that not just emphasizes human beings’ dependency on nature for sustenance, but also outlines human beings’ “responsibility for nature” drawing from romantic natural philosophy (one identifies with nature as self via sympathy with “natural beings” as humans depend on nature for creative ideas and products in an economy; Becker 2006: 20) and virtue ethics (nature offers practical lessons to human beings through personal encounters with nature that constitute “environmental education”; Becker, 2006: 20, 21).

Strategic bidding manifests in several ways. Firstly, strategic interdependent behavior may be seen in individuals who underbid or overbid which obscures their underlying preferences. Several scholars (e.g. Veisten, 2007: 222; Gatto and De Leo, 2000: 350; Munda, 1996: 163-164) observe

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that the non-rivalrous and non-excludability features of public goods like nature parks may prompt individuals to underbid in their actual payments by paying only part of their “true” WTP or nothing at all to see if others would pay enough to have a project implemented, or overbid in hypothetical payments in CV surveys to push for a conservation project but do not expect to pay for the amount they stated in these surveys. Farley et al (2015: 244) contend that most environmental problems can be characterised as prisoner’s dilemmas “best solved through cooperation, not competition”. They advance cooperation as the best solution as no market will trade in goods that are non- excludable which is freely available and non-rival which prices economic surplus for such a good at zero (Farley et al, 2015: 249). Strategic bidding appears to account for the endowment effect among other factors due to one’s strategic considerations in not revealing weakness during bargaining over giving up ownership of the product (Sunstein, 1993: 228).

Secondly, strategic behavior is observed in some protests against natural resource extraction on grounds of health or inequity interpreted or framed as “Not In My Back Yard” (NIMBY) responses (Avci et al, 2010: 230, 234). NIMBY-ism can rear its head when sites of least political and legal resistance are chosen for hazardous waste facilities because of the economic disenfranchisement of minorities who lack the will to resist such siting plans (Hamilton, 1995: 111), a phenomenon which Hamilton (1995: 109) terms as “environmental racism”.6 _{From a Coasean perspective,}

environmental racism occurs when profit maximizing firms choose to locate waste processing sites and other sites producing negative externalities in neighborhoods where individuals are poor, lowly educated and often identify with a particular ethnicity and thus unable to elicit high WTP

6 _{Hamilton (1995: 109) defines environmental racism with respect to two distinct features: 1) “environmental}

outcomes are associated with minorities” that have their roots in the “disparities” they face in non-environmental institutions and markets; and 2) environmental outcomes are a result of “actions made with discriminatory intent”,

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which can depress legal compensation in cases of liability (Hamilton, 1995: 110). A CXN explanation of environmental racism, however, views that minority groups may not be able to overcome free-rider problems and CXN problems to collectively demand compensation from the hazardous waste facility through the political process (e.g. via public complaints) (Hamilton, 1995: 110, 117). An alternative explanation using the pure discrimination model argues that the owner of the waste facility, a politician, or constituents of a political ward gain utility by trading off profits for prejudice towards minorities (Hamilton, 1995: 109). The pure discrimination model, Coase theorem and theory of collective action are all encompassed in Hamilton’s (1995: 111) notion of institutional racism. Hamilton (1995: 111, 122, 128) finds that siting facilities tend to contain a higher proportion of minorities, poor families, lower median household incomes and smaller proportion of the population with high school educational attainment, which is bolstered by the Commission for Racial Justice (1987) report.7 Hamilton (1993) in an earlier study finds a negative relation between the proportion of nonwhite populations in an area and the likelihood to reduce commercial hazardous waste processing. It is only through political activity of the residents such as via voting at the local level that can reduce the likelihood of a facility siting there (Hamilton, 1995: 129). The emotions evoked during such NIMBY protests may generate feelings of outrage similar to that when people are asked their WTA compensation for giving up some part of the environment to be traded off for monetary compensation (Sunstein, 1994: 835; 1993: 249).

That the choice of policy instrument can influence individuals’ choice behaviors but also expression of their underlying preferences—whether actual preferences or preferences expressed

7 _{The Commission for Racial Justice (1987) report finds that hazardous waste facility sites in the United States had}

twice the proportion of minorities (24%) compared to sites without the facility, and that 60% of Hispanic and black

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in an opportunity set—comport with the cognitive aspect of institutions as they influence the type of logics underlying people’s behaviors that in turn influence the “institutional frames” people apply to comprehend and act in a situation and how to influence these frames that people use (Vatn, 2005a: 215). The institutional frame forms the “context dependency” of the valuation instrument that is crucial to understanding the individuals’ perceived incentives to misrepresent their pre- exising preferences via bids (Mitchell and Carson, 1989: 235-259). Thus, one solution proposed is to deliberately not specify “clear and credible implementation rules” of enacting a policy in order to avoid strategic responses (Schläpfer, 2016: 36). However, Sen (1995: 30) criticises the vagueness of CV questions as CV surveyors can just be as “strategic” as respondents in eliciting information by “shaping” CV questions. Yet, Bartkowski and Lienhoop (2017: 557) counterargue that concerns with strategic behavior is “less relevant” if the goal of stated preference valuation is to raise awareness of environmental issues and demonstrate calculations of relative values rather than to inform CBA. Some have even advanced that strategic behavior is not as endemic as neoclassical theory might predict and can be mitigated by eliciting bids in a more indirect way (such as using the dichotomous choice format of elicitation) (Bartkowski and Lienhoop, 2017: 558). Indeed, Mitchell and Carson (1989) as the pioneers of the CV technique argue that strategic bias is not a major problem for the following reasons: 1) CV requires large amount of information; 2) CV conveys the impression that the large number of respondents surveyed would mean that their WTP do not influence overall outcome; 3) payment vehicle reminds respondents of their budget constraint; and 4) respondents are under the impression that underbidding might discourage the provision of the public good. Indeed, Arrow et al (1993: 4606) propose that a dichotomous choice yes-no question can avoid strategic interdependence provided that referenda on provision of public goods are common in the locality surveyed and that the CV survey is taken seriously.

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Yet, the threat of strategic behavior remains. Börger (2013: 156, 163), for example, argues that even if strategic behavior can be mitigated, valuation can elicit socially desirable responses in CV which are influenced by social or cultural norms perceived by the individual such as fear of social disapproval rather than desire for social approval, such as preserving the environment which is a socially desirable norm (Arrow et al, 1993: 157). This threat of socially desirable response is compounded by the hypothetical nature of CV survey questions and the costless consequences to the respondent who answers them (Börger, 2013: 157).

Another possible solution to attenuate the effects of strategic behavior is to inculcate trust among the valuers to encourage them to cooperate with one another based on their underlying preferences. Observers have noted that even markets also depend on “some level” of trust to honor commitments (e.g. deals, agreements) as businesses transacting based on purely strategic behavior may erode trust to the point of overly high transaction costs (such as over-regulation to ensure compliance) (Vatn, 2005a: 214; Soma, 2006: 39). Selfish agents’ exploitation of situations based on individuals’ goodwill or voluntary commitment can lead to free-riding (Vatn, 2005a: 214; Gatto and De Leo, 2000: 350). Trust in two forms benefits society: “vertical trust” between citizen and state by expanding the scope of problems that require governments to deal with (Scholz and Lubell, 1998: 399), and “horizontal trust” between one citizen and another which reduces the need for monitoring and punishment, i.e. costs of cooperation (Ostrom, 1990). Increased trust among individuals can lead to high levels of civic cooperation which, Owen and Videras (2006: 828) argue, are “more important” in “determining” support for environmental protection over economic growth in low income countries than high income countries. Such explanations are part of the social capital literature that can apply to differences in political and economic performances across

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nations as well as across sub-national jurisdictions (Ostrom and Ahn, 2003: 7). Even perceptions

of trust and duty among a sufficient proportion of citizenry can resolve social dilemmas while reducing the cost of enforcement (Scholz and Lubell, 1998: 413). Without trust, cooperation among individuals would have to rely on altruism or fear of punishment (Scholz and Lubell, 1998: 400), but violators in large groups are less likely to be caught because costs of monitoring and punishment are much larger (Hardin, 1982; Ostrom, 1990). To illustrate, Scholz and Lubell (1998: 411, 412; see also Farley et al, 2015: 249) show that citizens will meet their obligations to the country (e.g. tax compliance) as long as they trust other citizens and political leaders to honour their social contract obligations, even after controlling for effect of internalized sense of duty and fear of being punished for non-compliance.

Thus, institutional arrangements can affect WTP because whether respondents are willing to pay depends on their views about the institution’s level of effectiveness, reliability and trustworthiness to honor individuals’ commitments to pay for the public good based on their underlying preferences (Bateman et al, 2002). Institutions can affect WTP in two ways: low trust in the institution’s ability to supply the good may lead to “institution-related bias” which can generate high protest response rates, and choice of institution can affect the accuracy of the estimated values of the good (Remoundou et al, 2012: 382). This is evident in the payment vehicle bias which shows that the payment vehicle—and thus, trust in government—is important to respondents in deciding whether they should bear the responsibility to pay rather than the government (Blamey, 1998: 63- 64). Mitchell and Carson (1989: 237; see also Shogren, 2012: 355) define payment vehicle bias as “where the payment vehicle is either misperceived or is itself valued in a way not intended by the researcher”. Symptoms of the bias include respondents’ confusion between a purchase model and