Capturing zero-price effects in stated choice surveys: implications for willingness-to-pay and welfare

Abstract

Stated choice surveys commonly used in public policy appraisal – such as in transport or environmental economics – often contrast a ‘free’ status quo alternative against a range of (policy) interventions which can be implemented at a cost. Limited attention has, however, been paid to the fact that the ‘free’ nature of the status quo (SQ) alternative may make the SQ alternative overly attractive due to the zero-price (ZP) effect. The ZP effect is a well-established notion in behavioural economics explaining the phenomenon that individuals tend to over-react to free alternatives. We present an experimental design setup allowing the separation of the ZP effect from the SQ effect together with the identification of non-linear sensitivities to costs. Choices made by students between different mobile broadband packages are used for illustrational purposes. Our analysis shows that the ZP effect is significant and the observed preference to remain in the SQ is largely due to the ZP effect. In practice, this may lead to biased welfare estimates for public policy packages if the ZP effect is not explicitly accounted for. Moreover, we also show that misspecification of the functional form for cost can lead to significant bias in WTP estimates and the ZP and SQ effects. • Zero-price (ZP) effect shows individuals over-react to free alternatives. • Experimental design separates ZP from SQ effects and identifies non-linear cost sensitivities with student broadband choices. • Observed SQ preference is largely driven by the ZP effect. • Ignoring ZP could potentially lead to biased welfare estimates for policy packages. • Misspecifying the functional form of cost can bias WTP estimates and the ZP and SQ effects.