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Value and Outcome Uncertainty as Explanations for the WTA vs WTP Disparity: Theory and Experimental Evidence

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Author Info
William Neilson
Michael McKee
Robert P. Berrens

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Abstract

This paper contributes to the widespread discussion of the sources of the divergence between WTA and WTP values. The paper reports on theoretical and empirical investigations which show that value and outcome uncertainty offer an explanation for this disparity. Given a set of hypotheses generated by the theory, the paper investigates the disparity using an inducedvalue experimental laboratory setting. The incentive-compatible Becker-DeGroot-Marshak mechanism is employed to elicit the WTP and WTA values. Two conclusions can be drawn from the empirical results. First, the WTA - WTP difference is generally increasing in both value and outcome uncertainty. Second, a re-contracting option reduces the disparity when it arises from value uncertainty. Key Words: Experimental, Uncertainty, WTP-WTA disparity

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Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 08-07.

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Date of creation: 2008
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Handle: RePEc:apl:wpaper:08-07

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Find related papers by JEL classification:
C9 - Mathematical and Quantitative Methods - - Design of Experiments
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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  7. Harrison, Glenn W., 1986. "An experimental test for risk aversion," Economics Letters, Elsevier, vol. 21(1), pages 7-11. [Downloadable!] (restricted)
  8. Eisenberger, Roselies & Weber, Martin, 1995. "Willingness-to-Pay and Willingness-to-Accept for Risky and Ambiguous Lotteries," Journal of Risk and Uncertainty, Springer, vol. 10(3), pages 223-33, May.
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  11. 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, vol. 38(1), pages 66-80, July. [Downloadable!] (restricted)
  12. Kachelmeier, Steven J & Shehata, Mohamed, 1992. "Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China," American Economic Review, American Economic Association, vol. 82(5), pages 1120-41, December. [Downloadable!] (restricted)
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