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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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Author Info
De Borger B.
Mogens F.
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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Paper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006034.

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Length: 26 pages
Date of creation: Dec 2006
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Handle: RePEc:ant:wpaper:2006034

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  1. Kenneth A. Small & Clifford Winston & Jia Yan, 2005. "Uncovering the Distribution of Motorists' Preferences for Travel Time and Reliability," Econometrica, Econometric Society, vol. 73(4), pages 1367-1382, 07. [Downloadable!] (restricted)
  2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Framed Field Experiments 0047, The Field Experiments Website. [Downloadable!]
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  5. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November. [Downloadable!] (restricted)
  6. Diamond, Peter A & Hausman, Jerry A, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 45-64, Fall. [Downloadable!] (restricted)
  7. Andreoni, James, 1995. "Warm-Glow versus Cold-Prickle: The Effects of Positive and Negative Framing on Cooperation in Experiments," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 1-21, February. [Downloadable!] (restricted)
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  8. Mogens Fosgerau, 2004. "Investigating the distribution of the value of travel time savings," Urban/Regional 0411006, EconWPA. [Downloadable!]
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  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  10. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February. [Downloadable!] (restricted)
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  11. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November. [Downloadable!] (restricted)
  12. Horowitz, John K. & McConnell, K. E., 2003. "Willingness to accept, willingness to pay and the income effect," Journal of Economic Behavior & Organization, Elsevier, vol. 51(4), pages 537-545, August. [Downloadable!] (restricted)
  13. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
  14. Randall, Alan & Stoll, John R, 1980. "Consumer's Surplus in Commodity Space," American Economic Review, American Economic Association, vol. 70(3), pages 449-55, June. [Downloadable!] (restricted)
  15. Mogens Fosgerau, 2005. "Specification Of A Model To Measure - The Value Of Travel Time Savings From Binomial Data," ERSA conference papers ersa05p77, European Regional Science Association. [Downloadable!]
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