Embedding in market demand systems (Q1267647)

This paper addresses the question whether the contingent valuation (CV) is unreliable because of the embedding phenomenon, namely that willingness to pay for a particular commodity may vary greatly depending on whether the good is assessed on its own or is embedded a part of a more inclusive. The paper resolves this controversy by determining whether the level of embedding is one of the conditions to which economic value should be responsive or merely irrelevant side conditions. The paper first summarizes the standard theoretical results concerning the valuation of complex packages and their component goods. It then simulates an estimated demand function for rice to show that embedding effects that are observed in CV of non-market goods are also observed in market demands for private goods. Therefore, embedding effects do not establish the invalidity of CV in general or in particular applications. However, the CV process may have a tendency to exacerbate embedding effects.