MULTILEVEL MODELLING AND

CONTINGENT VALUATION
PART I: A TRIPLE BOUNDED
DICHOTOMOUS CHOICE ANALYSIS

by:
Ian H. Langford
Ian J. Bateman
and
Hugh D. Langford

CSERGE Working Paper GEC 94-04

MULTILEVEL MODELLING AND

CONTINGENT VALUATION
PART I: A TRIPLE BOUNDED
DICHOTOMOUS CHOICE ANALYSIS
by
Ian H. Langford1
Ian J. Bateman1
and
Hugh D. Langford2

Centre for Social and Economic Research on the Global

Environment, School of Environmental Sciences,
University of East Anglia, Norwich and University College,
London, United Kingdom
2

School of Science and Technology, Dewsbury College,

Halifax Road, Dewsbury, United Kingdom

Acknowledgements
The Centre for Social and Economic Research on the Global Environment (CSERGE) is a
designated research centre of the UK Economic and Social Research Council (ESRC)
The analyses were performed with a statistical software package called ML3, developed by the
Multilevel Models Project at the Institute of Education, London. The authors would like to thank
the Multilevel Models Project team for their help in using the software. Any errors of analysis or
interpretation remain the sole responsibility of the authors.
ISSN 0967-8875

Abstract

The use of dichotomous choice (DC) questions in the elicitation of willingness to pay (WTP) in
contingent valuation studies is common practice at the present time. Recent research has
shown that double-bounded DC questions provide statistically superior results to singlebounded questions, given an appropriate sampling design. This paper uses a relatively new
multilevel modelling technique to analyze a triple-bounded DC design, which in addition includes
an initial non-monetary question on whether an individual accepts, in principle, a WTP some
unspecified amount. The theoretical basis of the multilevel model used is described, and some
of the possibilities of this powerful and versatile technique are discussed. The practical
operation of the multilevel model is demonstrated using data from a contingent valuation study
conducted in the Norfolk Broads, England, an internationally important wetland resource.

1.

INTRODUCTION

The use of dichotomous choice (DC) questions in eliciting willingness-to-pay (WTP) from
contingent valuation studies is an increasingly popular technique (Bateman and Turner 1992).
DC was the recommended evaluation mechanism in the "blue ribbon" NOAA report (1992).
However, Hanemann et al (1991) demonstrate, using maximum likelihood solutions, that a
double-bounded DC strategy is statistically more efficient than a single question. In other words,
eliciting whether an individual is willing to pay a higher bid if they respond "yes" to the initial bid,
or willing to pay a lower amount if they respond "no", provides more information which, if the bid
selection strategy is correct (Kanninen 1993) reduces the variance of estimated WTP.

Here, a relatively novel multilevel modelling approach (Goldstein 1987) will be applied to a triplebounded DC bidding game, although extension to the n-bounded case is a trivial problem.
Hanemann et al (1991) used a multinomial logistic design to estimate likelihoods for the
probabilities of choosing each of the possible set of answers to the double-bounded DC
question. In contrast, a multilevel binary response model with multiple responses is fitted,
allowing inclusion of a "yes/no" WTP question not associated with a particular bid level in the
statistical model. Further, issues concerning potential biases within the DC framework
(Kahnemann 1986) can be examined directly using such an approach.

The following section details the multilevel model used, and describes some of its theoretical
power and possibilities. Results are then presented for a large scale triple-bounded DC survey
of the Norfolk Broads, an internationally important wetland in eastern England in the UK (for
details see Bateman et al 1993). The discussion then focuses on the particular information
which can be extracted using a multilevel modelling approach. As the paper is primarily
concerned with a new methodology for contingent valuation, particular deductions that can be
made for the case study examined will be left for discussion elsewhere.

2.

DATA STRUCTURE

The data used in the analysis initially consist of 2026 responses to a question eliciting whether
or not an individual agreed, in principle, to paying some amount in extra taxation over the
following year to preserve the Norfolk Broads from seawater inundation (Bateman et al 1992).
Those individuals who agreed to the principle of payment were then offered one of eight initial
bid levels (namely 1, 5, 10, 20, 50, 100, 200 or 500), chosen following the results of a
pilot study (Bateman et al 1993). Depending on the response to this initial bid level, respondents
were asked a maximum of two other questions relating to successive doublings or halvings in
bid level (see Figure 1),
Figure 1:

The structure of the bidding game used in the Norfolk Broads Study

presented as actual monetary figures. The data associated with each individual therefore
consisted of between one response (a "no" to the WTP anything question) and four responses
(a "yes" to the initial question plus answers to, at most, three bid levels). The data can therefore
be viewed as essentially hierarchical in nature, with each individual being measured repeatedly
by "yes/no" responses to a maximum of four separate questions. Further, individuals are nested
within each of the eight initial bids presented and the full hierarchical structure of the data can be
viewed as being a three level model as shown in figure 2, with responses at level 1, individuals
at level 2, and initial bid level presented at level 3.

3.

METHOD

The form of analysis undertaken falls within the category of generalized linear mixed models
(GLMMs), defined as (Breslow and Clayton 1993):
E(Y_e_ = h(Xbeta_ Ze_

(1)

where, in line with the principles of generalised linear modelling, Y is a univariate response
variable, X a design matrix associated with a vector of fixed coefficients and h is the inverse
link function relating the conditional means of y to the linear predictors (McCullagh and Nelder
1989). The main difference here is that instead of assuming that, after fixed effects are
controlled for, remaining variation in the model can be summarised by a single vector of random
terms, we explicitly model the random effects in the model by use of a vector of random
coefficients e associated with a design matrix Z (X and Z may or may not coincide). Goldstein
(1991) provides a theoretical basis for applying (1) as a multilevel model to discrete response
data, using marginal quasi-likelihood estimation (Breslow and Clayton 1993).

In this case, with binary response data, we may model ij, the probability of the jth individual
responding "no" to the ith question as being:
exp(fij + rj )
ij =
1 + exp(fij + rj )

(2)

where fij represents the fixed part of the model and rj the random part (Paterson 1993), so that:

yij = ij + eij

(3)

ij
ln (
) = fij + rj
1 - ij

(4)

with E(eij) = 0. If we rewrite (2) as:

then we have a model linear in fij and rj and can specify what we wish these separate parts of
the model to be. Bishop and Heberlein (1979) suggest the use of a log-logistic c.d.f. for the fixed
part of the model, and hence we can write:
fij = a + k + bLNBIDij

(5)

where a is the intercept, b the slope and LNBID the natural logarithm of bid level. k is simply an
offset on the intercept accounting for those individuals who replied "no" to the "WTP anything at
all" question, and hence did not enter the bidding process. The fixed part will remain the same in
all the models which follow, where the main focus of attention will be on the random part.

We first need to specify the level 1 variance of the eij, associated with each "yes/no" response
from each individual. As we are modelling binary responses, we can assume that:
2
var(eij ) = ij (1 - ij )
e

where = 1 would indicate purely binomial variation, an assumption which can be tested for.
However, in the random part of the model at level 2, we have to estimate rj. Initially this can be
written as:
rj = uj + vj LNBIDij

where uj is a parameter measuring the variance associated with the intercept a, and vj
measures the variance associated with the slope, b. Using generalised linear modelling terms,
we have defined the linear predictor as being made up of the fixed part fij and the random part rj
(Paterson 1993; Aitken et al 1989) with residual error term eij. An important point to note at this
point is that eij varies at level 1 of the model (the response level), whilst rj varies at level 2 (the
individual level), and that level 1 is nested within level 2.

However, there is no reason to assume that only one measure of extra-binomial variation is
associated with level 1 responses. It is also possible to study a more complex level 1 variance
structure by specifying that:
2
var(eij ) = ij (1 - ij )
ei

(8)

so that a different term i is associated with each of the i possible responses.

A further refinement would be to study the variance of the intercept and slope parameters from
their expected values depending on the initial bid level specified. This is an important issue in
DC elicitation, as "anchoring" effects from the choice of initial bid level are suspected as being a
potential bias in estimated WTP (Kahnemann and Tversky 1982; Kristrom 1993; Bateman et al
1993). This could be done by the inclusion of dummy variables for each initial bid level, but may

be more usefully modelled by the creation of a third level of analysis defined as being the initial
bid level offered, within which individuals are nested (with an extra category to account for those
WTP nothing at all). This is of particular value if a large number of initial bid levels are specified
(see discussion below). Hence, the fixed part of the model may be rewritten as:
fijk = a + k +bLNBIDijk

(9)

rjk = ujk + sk + vjk LNBIDijk + tk LNBIDijk

(10)

and the random part as:

where the jth individual at level 2 is nested with the kth initial bid level unit at level 3 (see Figure
2). Comparative residuals (Goldstein 1987) for the intercept and slope may be calculated for
each level 3 unit, i.e. each bidding game starting from a unique initial bid level. These residuals
are conditional estimates, after controlling for the fixed effects (Bryk and Raudenbush 1992).
From these, empirical Bayes estimates of the intercept and slope derived from each bidding
game may be calculated.

Figure 2:

The hierarchical structure of the data analysed

4.

RESULTS

Table 1 displays the results from the random coefficients model defined by equations (5), (6)
and (7) with one parameter measuring the extra-binomial variation at level 1, and both the
intercept and slope having random terms at level 2. This model will be referred to as Model A.
The estimate of represents the variance associated with uj, the random term associated with
the intercept. This is strictly not the same as the variance associated with a, as this (included as
a standard error in the fixed part of the model) is a measure of confidence in the mean, or
expected value of the intercept, and will be an underestimate of the true variance of the range of
values obtained by allowing individuals to vary at level 2 (Goldstein 1987; Langford and
Bateman 1993). Similarly, is a measure of the variance associated with the random term vj,
and uv a measure of the covariance between uj and vj. Hence, these measures of variance may
be used in the calculation of confidence intervals for E(WTP) rather than the standard errors of a
and b. Using the delta method (Adelbasit and Plackett 1983; Duffield and Patterson 1991) gives
the median WTP to be 81.65 (approx. 95% C.I. = 44.32 - 118.97). The random variation at
level 1 is slightly less than 1, suggesting that the data is underdispersed compared to the
binomial assumption.

Table 2 shows the results obtained from allowing the variance at level 1 to vary between
response categories (Model B). Hence, there are separate variance estimates for the initial
"yes/no" question on WTP anything at all, the initial bid level, and the subsequent questions.
The first thing to note is that the deviance statistic of overall goodness of fit has dropped
significantly. Secondly, there do appear to be significant differences in the estimates of variance
at level 1. The variance increases as one moves from the WTP anything at all question (which is
comparatively estimated at zero), from the initial bid level to the subsequent questions. The
variance associated with uj has also increased substantially, as to some extent we are fitting
different bid curves to the responses from different questions by allowing their variances to be
heterogenous. Hence, the measurement of variance surrounding the intercept at LNBID = 0,
represented by uj, increases quite dramatically, and is probably not a good estimator for
calculating confidence intervals around E(WTP) in this instance (see discussion).

In model C (Table 3), a third level is fitted, with each unit being associated with a different initial
bid level. For the sake of simplicity of explanation, the variance at level 1 has been measured by
a single parameter. Results are presented in Table 3. The variance associated with the intercept
has again increased, which is not surprising as a separate slope is being fitted to each bidding

game, starting from each bid level, and hence each separate line will cross the y axis at a
different value. Figure 3 represents the regression lines fitted to each level 3 unit, on a logit
scale, plotted against LNBID. The variance estimates at level 2 are now zero, suggesting that all
the variation between individuals can be explained by the starting bid level they are presented
with. The level 1 coefficient of variation is now much less than the binomial expectation.

Table 1:

Fixed and random coefficients from Model A

Parameter:

Estimate

St. error

0.3864
-0.0675
0.01213

0.2154
0.0521
0.0144

0.9584

0.0228

-3.175
1.501
0.7212

0.1078
0.1224
0.0257

Random:
Level 2:

uv

Level 1:

Fixed:
a
k
b

-2 ln likelihood = 20342.4, degrees of freedom = 6375

Table 2:

Fixed and random coefficients from Model B

Parameter:

Estimate

St. error

7.159
-1.667
0.384

0.2362
0.0565
0.0153

0.0
0.4942
0.9091
1.010
1.014
1.183

0.0
0.0200
0.0388
0.0711
0.0558
0.1175

-2.172
0.499
0.4784

0.0969
0.0754
0.0234

Random:
Level 2:

uv

Level 1:
ny
x
x
.5x
x
.25x
Fixed:
a
k
b

-2 ln likelihood = 17136.7, degrees of freedom = 6370

Table 3: Fixed and random coefficients from Model C

Parameter:

Estimate

St. error

10.08
-0.5215
0.04742

4.765
0.3005
0.0248

0.0
0.0
0.0

0.0
0.0
0.0

0.7171

0.01272

-2.171
0.0948
0.7211

1.0680
0.1516
0.0855

Random:
Level 3:

uv

Level 2:

uv

Level 1:

Fixed:
a
k
b

-2 ln likelihood = 11081.0, degrees of freedom = 6363

Figure 3:

Graph of the separate slopes and intercepts for each bidding game
(starting from a unique bid level)

5.

DISCUSSION

Model A demonstrates some of the versatility of the hierarchical model used. The variance
associated with each response at level 1 can be estimated separately from the variation at the
individual level 2. Further, the fixed parameters at level 2 are estimates conditional on the level 1
variance, and are measures of the mean or expected values for the population of all individuals
included in the study, and their standard errors. However, the random terms at level 2 describe
the variance between individuals, and hence are more appropriate for the calculation of
confidence intervals around estimates of the fixed parameters. In effect, the model presented is
a more complex, multiparamter representation of the random effects model described by
Langford and Bateman (1993) based on the work of Williams (1982).

In Model C, it would have been possible to estimate a separate intercept and slope for each
bidding game starting from an initial bid level. However, in this case we are estimating mean
values of a and b for the population of all bid levels. Hence, we have separate estimates of the
population means (with associated standard error) for the intercept and slope in the fixed part of
the model, and the population estimate of the variance of the intercept and slope (with
associated standard error) in the random part. This introduces a new dimension into the
sampling strategy appropriate for CV studies. Rather than sampling many individuals at
relatively few bid levels to ensure reliable estimates for each sample at each bid level, it would
be more efficient (provide more useful information) in the multilevel model to have fewer
individuals at many bid levels. The present example was originally sampled for an ordinary least
squares (OLS) design, but rather than having roughly 200 individuals at each of 8 initial bid
levels, it would be better to have approximately 20 individuals at each of 40 initial bid levels. This
is because each individual's responses contribute to the overall population means of the
parameters estimated, not just to the mean of the particular subsample they are included in.
Similarly, having a bidding game with more questions, or bounds, would simply increase the
amount of useful information available with a minimal increase in complexity of the model.

Further, when looking at the contrasts between level 3 units, and calculating separate intercepts
and slopes estimated for each level 3 unit (Figure 2), it must be noted that these are not wholly
independent, as they would be in an OLS random coefficients model, but are empirical Bayes
estimates. This is again because, given the hierarchical structure of the model, we are making a
population estimate of intercept and slope, represented by the fixed part of the model, and the
estimates for each level 3 unit are to some extent shrunken towards this population mean. Level

10

3 units with more individuals, given an unbalanced sampling design, will contribute more
towards the estimates of the fixed parameters, while smaller (and hence less reliable) level 3
units will contribute less, and be shrunken more towards the mean.

Model B displays the versatility of the model by the inclusion of separate variance estimates for
each response category at level 1. The increase in variance for questions subsequent to the
initial bid level question may reflect growing uncertainty associated with responses to the
second and third bid level questions. Hence, whilst including further bounds in a DC model may
reduce the overall variance, the information provided at each successive stage may become
more variable. The residual deviance statistic is not a good measure of overall fit in binary
response models (McCullagh and Nelder 1989), but the difference in deviance between two
models may be used to estimate comparative goodness of fit, and the residual difference falls
dramatically from model A to model B, suggesting the extra level 1 parameters should be
included in the model. Goldstein (1987) points out that the inclusion of parameters in the
random part of the model should be judged from the likelihood ratio (reduction in deviance)
rather than from t-values of parameter estimates.

Similarly, the introduction of level 3 into the model again produces a large drop in residual
deviance, whilst the variance of the random term associated with the intercept increases. Here,
we are allowing separate estimates to be made for each level 3 unit, and so each fitted
regression line will have a separate intercept, sometimes well below the values of LNBID used
to calculate the fitted line. Hence, the variance of the population mean of the intercepts is much
higher than in model A. This demonstrates the necessity for the range of initial bid levels chosen
to be adequately distributed across the range of likely WTP amounts to be offered (Kanninen
1993). Alternatively, it could be argued that the disparity between estimates of the intercept for
bidding games starting from different initial bid levels is evidence for "anchoring" effects caused
by the choice of initial bid. On the other hand, the slopes of the fitted regression lines are quite
similar (Figure 2). This is a matter of some debate, and discussion will be left for elsewhere.
Here, it is sufficient to note that the degree of "anchoring" present may be investigated by
careful examination of the random part of the model at different levels.

Finally, it is worth examining the equivalent surplus measure E(WTP) from model (1), namely
81.65. The study from which the data were drawn also performed an open-ended (no
prompting with bid levels) survey, and a single bounded DC analysis based solely on the
responses to the initial bid level question. The corresponding measures of E(WTP) were 67.19

11

for the open-ended study and 143.48 for the single bounded DC analysis. There has been
much debate on the possible inflation of DC WTP estimates compared to the results of openended questions (Bateman and Langford 1993), but here we can see that, with the extra
information provided by the triple bounded DC analysis, the estimate of E(WTP) has fallen to be
comparable with the open-ended result.

In conclusion, this example demonstrates the great power and versatility which multilevel
modelling can potentially bring to contingent valuation studies. Further refinements could be the
inclusion of covariates such as income, age and usage at different levels of the model. Specific
studies designed for the multilevel approach need to be undertaken (the authors intend initiating
one such study in the future), as the multilevel model may provide detailed information on the
elicitation process and perhaps provide more reliable estimates of willingness to pay.

12

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