Integrating the Community Perspective: An exploration of Prospect Theory as a tool to derive benefits in Negotiated Agreements

This paper provides an overview of negotiated agreements as strategies for community engagement in conjunction with insights from the field of behavioral economics, specifically Prospect Theory. Prospect Theory posits that losses are valued more than gains from a reference state and result in large valuation disparities in experimental studies. This study estimates valuation disparities within compensating and equivalent variation measures of WTP and WTA in a structured field experiment. A case study undertaken in Loreto, Baja California Sur, explores interactions between tourism development and impacts to household water security. The study finds moderate valuation disparities ranging from 1.09 to 1.15 that were statistically significant when maximum likelihood estimation was used. The paper then discusses whether applied Prospect Theory can function as a tool to derive benefits within negotiated agreement frameworks.The research concludes that participating communities may benefit from being able to retain a greater share of development benefits at local scales.