Welfare Analysis for Climate Risk Reductions: Are Current Treatments of Outcome Uncertainty Sufficient?

Discrete choice experiments often include attributes subject to outcome uncertainty (OU), defined as uncertainty regarding actual attribute levels that will occur. Most choice experiments that incorporate OU do so using scenarios that allow for only two possible outcomes distinguished by a single probability. Because few environmental phenomena are characterized by two possible outcomes, characterizing scenarios in this way requires analysts to reframe actual conditions, discretizing the underlying continuous probability density function into two intervals. The implications of this reframing for welfare estimation are almost universally unknown. This article evaluates the convergent validity of welfare estimates from a more complex and accurate treatment of OU, compared to the traditional two-outcome approach. Methods and results are illustrated using an application to coastal flood adaptation in Connecticut, USA. Results show that a higher-resolution, multiple outcome treatment of OU provides additional information on risk preferences and willingness to pay (WTP), but also suggest that multiple outcome treatments increase task complexity. These tradeoffs highlight challenges facing the valuation of outcomes subject to OU.