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Willingness-to-Pay, Compensating Variation, and the Cost of Commitment

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The authors present a dynamic model of an agent's decision to purchase or sell a good under the following conditions: uncertainty, irreversibility, and learning over time. As the authors show, an agent's willingness-to-pay (WTP) is influenced by both the intrinsic value of the good and the commitment cost associated with delaying the decision until more information is available. Consequently, the standard Hicksian equivalence between WTP and compensating and equivalent variation no longer holds. This finding has important practical implications because it implies that observed WTP values are not always appropriate for welfare analysis.

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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 00-wp251.

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Date of creation: Aug 2000
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Handle: RePEc:ias:cpaper:00-wp251

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Cited by:
  1. Richard Carson & Theodore Groves, 2007. "Incentive and informational properties of preference questions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 181-210, May.
  2. Adamowicz, Wiktor L., 2004. "What's it worth? An examination of historical trends and future directions in environmental valuation," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(3), September.
  3. Jay R. Corrigan, 2005. "Is the Experimental Auction a Dynamic Market?," Working Papers 0501, Kenyon College, Department of Economics.
  4. Jay R. Corrigan & Catharine L. Kling & Jinhua Zhao, 2006. "The Dynamic Formation of Willingness to Pay: An Empirical Specification and Test," Working Papers 0603, Kenyon College, Department of Economics.
  5. Nababan, Tongam Sihol & Simanjuntak, Juara, 2008. "Aplikasi Willingness To Pay Sebagai Proksi Terhadap Variabel Harga: Suatu Model Empirik Dalam Estimasi Permintaan Energi Listrik Rumah Tangga
    [The Application of Willingness To Pay As A Proxy To Va
    ," MPRA Paper 49155, University Library of Munich, Germany.
  6. Krüger, Niclas A. & Svensson, Mikael, 2009. "The impact of real options on willingness to pay for mortality risk reductions," Journal of Health Economics, Elsevier, vol. 28(3), pages 563-569, May.
  7. Baylis, Katherine R. & Vercammen, James, 2006. "Scientific Uncertainty and Climate Change Policy," 2006 Annual meeting, July 23-26, Long Beach, CA 21267, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. Carson, Richard T. & Hanemann, W. Michael, 2006. "Contingent Valuation," Handbook of Environmental Economics, in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 2, chapter 17, pages 821-936 Elsevier.
  9. van Exel, N.J.A. & Brouwer, W.B.F. & van den Berg, B. & Koopmanschap, M.A., 2006. "With a little help from an anchor: Discussion and evidence of anchoring effects in contingent valuation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(5), pages 836-853, October.
  10. Catherine L. Kling & John A. List & Jinhua Zhao, 2010. "A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity," NBER Working Papers 16483, National Bureau of Economic Research, Inc.
  11. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
  12. Laurent Muller & Bernard Ruffieux, 2011. "Do price-tags influence consumers’ willingness to pay? On the external validity of using auctions for measuring value," Experimental Economics, Springer, vol. 14(2), pages 181-202, May.
  13. Lusk, Jayson L. & Norwood, F. Bailey, 2009. "Bridging the gap between laboratory experiments and naturally occurring markets: An inferred valuation method," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 236-250, September.
  14. Jay Corrigan & Catherine Kling & Jinhua Zhao, 2008. "Willingness to Pay and the Cost of Commitment: An Empirical Specification and Test," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(2), pages 285-298, June.
  15. Zhao, Jinhua & Kling, Catherine L., 2006. "Environmental Valuation Under Dynamic Consumer Behavior," Staff General Research Papers 2106, Iowa State University, Department of Economics.
  16. Jinhua Zhao & Catherine L. Kling, 2002. "Environmental Valuation under Dynamic," Center for Agricultural and Rural Development (CARD) Publications 02-wp292, Center for Agricultural and Rural Development (CARD) at Iowa State University.

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