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Substitutability, experience, and the value disparity: evidence from the marketplace

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  • List, John A.

Abstract

Several experimental studies have recently provided strong evidence that the basic independence assumption, which is used in most theoretical and applied economic models to assess the operation of markets, is rarely appropriate. These results, which clearly contradict closely held economic doctrines, have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory. This paper refutes the generality of these experimental findings by going to a well-functioning marketplace and examining more than 350 individual decisions across various incentive compatible elicitation mechanisms. The data suggest that individuals with significant marketlike experience behave largely in accordance with neoclassical predictions: any observed WTA/WTP disparity amongst this group can be explained by neoclassical arguments. In light of these findings, I believe that we have discarded neoclassical explanations of the value disparity too quickly. More narrowly, these empirical results have important implications for stated valuation methods, such as contingent valuation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 47 (2004)
Issue (Month): 3 (May)
Pages: 486-509

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Handle: RePEc:eee:jeeman:v:47:y:2004:i:3:p:486-509

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Web page: http://www.elsevier.com/locate/inca/622870

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References

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  1. Catherine L. Kling & John A. List & Jinhua Zhao, 2003. "WTP/WTA Disparity: Have We Been Observing Dynamic Values but Interpreting Them as Static?, The," Center for Agricultural and Rural Development (CARD) Publications, Center for Agricultural and Rural Development (CARD) at Iowa State University 03-wp333, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  2. Knetsch, Jack L., 1990. "Environmental policy implications of disparities between willingness to pay and compensation demanded measures of values," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 18(3), pages 227-237, May.
  3. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, American Economic Association, vol. 79(5), pages 1277-84, December.
  4. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 479-505, May.
  5. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, Econometric Society, vol. 72(2), pages 615-625, 03.
  6. Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(3), pages 679-90, August.
  7. Kolstad, Charles D. & Guzman, Rolando M., 1999. "Information and the Divergence between Willingness to Accept and Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 38(1), pages 66-80, July.
  8. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, Springer, vol. 4(3), pages 257-269, December.
  9. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments, The Field Experiments Website 00297, The Field Experiments Website.
  10. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, American Economic Association, vol. 72(5), pages 923-55, December.
  11. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 44(3), pages 426-447, November.
  12. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, American Economic Association, vol. 81(3), pages 635-47, June.
  13. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 554-66, September.
  14. List, John A & Shogren, Jason F, 1998. "The Deadweight Loss of Christmas: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 88(5), pages 1350-55, December.
  15. Morrison, Gwendolyn C, 1997. "Resolving Differences in Willingness to Pay and Willingness to Accept: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 236-40, March.
  16. Jinhua Zhao & Catherine L. Kling, 1998. "Real Options and the WTP/WTA Disparity," Center for Agricultural and Rural Development (CARD) Publications, Center for Agricultural and Rural Development (CARD) at Iowa State University 99-wp206, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  17. Randall, Alan & Stoll, John R, 1980. "Consumer's Surplus in Commodity Space," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 449-55, June.
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Citations

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Cited by:
  1. John A. List, 2011. "Does Market Experience Eliminate Market Anomalies? The Case of Exogenous Market Experience," NBER Working Papers 16908, National Bureau of Economic Research, Inc.
  2. John A. List, 2006. "Using Hicksian Surplus Measures to Examine Consistency of Individual Preferences: Evidence from a Field Experiment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 108(1), pages 115-134, 03.
  3. Clark, Jeremy & Friesen, Lana, 2008. "The causes of order effects in contingent valuation surveys: An experimental investigation," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 56(2), pages 195-206, September.
  4. Makokha, Stella Nabwile & Karugia, Joseph Thuo & Staal, Steven J. & Oluoch-Kosura, Willis, 2006. "Valuation of Cow Attributes by Conjoint Analysis: A Case Study in Western Kenya," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia, International Association of Agricultural Economists 25752, International Association of Agricultural Economists.
  5. Edward J. Lopez & W. Robert Nelson, 2005. "The Endowment Effect in a Public Good Experiment," Experimental, EconWPA 0512001, EconWPA.
  6. James K. Hammitt, 2013. "Positive versus Normative Justifications for Benefit-Cost Analysis: Implications for Interpretation and Policy," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, Association of Environmental and Resource Economists, vol. 7(2), pages 199-218, July.
  7. Kingsley, David C. & Brown, Thomas C., 2013. "Value learning and the willingness to accept–willingness to pay disparity," Economics Letters, Elsevier, Elsevier, vol. 120(3), pages 473-476.

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