Eliciting risk preferences for intrinsic attributes

Abstract

Risk is an important attribute of goods, whereby the utility derived from that attribute is determined by one's attitude to risk. We develop a novel approach to leverage data on risk attitudes from a fully incentivized risk elicitation task to model intrinsic riskiness of alternatives in a choice experiment. In a door-to-door survey, 981 respondents participated in a discrete choice experiment to elicit preferences over alternative sources of municipal water, conditional on water price and quality. Additional source attributes, such as supply risks due to the water source being weather dependent or technology risks are treated as intrinsic as they cannot be plausibly disassociated from the water supply source. The risk task allows the estimation of a coefficient of constant relative risk aversion (CRRA) for an individual, which is incorporated into the preference estimation to test the hypotheses that supply risk and new technology risk are important intrinsic attributes for new water sources. Participants are not given information about supply or technological risks of the sources to avoid framing effects driving the results. Controlling for water quality and cost, we find that supply risk is an important determinant of participants' choices, while respondents are not concerned about technology risk.

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