Discrete choices and the trade off between money and time: Another test of the theory of reference dependent preferences
AbstractWe 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 InfoPaper provided by University of Antwerp, Faculty of Applied Economics in its series Working Papers with number 2006034.
Length: 26 pages
Date of creation: Dec 2006
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-DCM-2007-10-20 (Discrete Choice Models)
- NEP-UPT-2007-10-20 (Utility Models & Prospect Theory)
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