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Discrete choices and the trade off between money and time: Another test of the theory of reference-dependent preferences

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  • DE BORGER, Bruno
  • FOSGERAU, Mogens

Abstract

We consider binary choices on the trade-off between money and travel time, and formulate a model of reference-dependent preferences based on a linear reference-free utility function. Reference-dependence is captured by value functions that are centered at the reference. The model predicts a particular relationship between four commonly used valuation measures (willingness to pay (WTP), willingness to accept (WTA), equivalent gain (EG) and equivalent loss (EL)), and is has directly testable implications. Moreover, we show that the model allows recovering the underlying reference-free value of time. Based on a large survey data set, we estimate an econometric version of the model, allowing for both observed and unobserved heterogeneity. We find strong supporting evidence for reference-dependence in a series of tests of high statistical power. The gap between WTP and WTA is found to exceed a factor four. Loss aversion plays an important role in explaining responses; moreover, drivers are more loss averse in the time dimension than the cost dimension. We further find evidence of asymmetrically diminishing sensitivity. Finally, we show that the fraction of ┬┤mistakes`, in the sense that participants are observed to sometimes select dominated options, varies systematically in a way consistent with the model of reference-dependence.

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Bibliographic Info

Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006034.

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Length: 28 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:ant:wpaper:2006034

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Postal: Prinsstraat 13, B-2000 Antwerpen
Web page: https://www.uantwerp.be/en/faculties/applied-economic-sciences/
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Keywords: Reference-dependence; Loss aversion; WTP-WTA gap; Value of time;

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References

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  1. Mogens Fosgerau, 2005. "Specification Of A Model To Measure The Value Of Travel Time Savings From Binomial Data," Urban/Regional, EconWPA 0508008, EconWPA.
  2. 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.
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  8. Lars Hultkrantz & Reza Mortazavi, 2001. "Anomalies in the Value of Travel-Time Changes," Journal of Transport Economics and Policy, London School of Economics and University of Bath, London School of Economics and University of Bath, vol. 35(2), pages 285-299, May.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
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  11. 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.
  12. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  13. Mogens Fosgerau, 2004. "Investigating the distribution of the value of travel time savings," Urban/Regional, EconWPA 0410005, EconWPA, revised 25 Nov 2004.
  14. Peter A. Diamond & Jerry A. Hausman, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(4), pages 45-64, Fall.
  15. 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.
  16. Kenneth A. Small & Clifford Winston & Jia Yan, 2005. "Uncovering the Distribution of Motorists' Preferences for Travel Time and Reliability," Econometrica, Econometric Society, Econometric Society, vol. 73(4), pages 1367-1382, 07.
  17. John Calfee & Clifford Winston & Randolph Stempski, 2001. "Econometric Issues In Estimating Consumer Preferences From Stated Preference Data: A Case Study Of The Value Of Automobile Travel Time," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 699-707, November.
  18. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(4), pages 1039-61, November.
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