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Dynamic Formation of Willingness to Pay: An Empirical Specification and Test , The

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Author Info
Jay Corrigan
Catherine L. Kling () (Center for Agricultural and Rural Development (CARD))
Jinhua Zhao

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Abstract

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. However, in a dynamic setting characterized by uncertainty, irreversibility, and the potential for learning, willingness to pay may also contain an option value. In this paper, we incorporate the dynamic nature of the value formulation process into a study using a contingent valuation method, designed to measure the value local residents assign to a north-central Iowa lake. Our results show that willingness to pay is highly sensitive to the potential for future learning. Respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those who faced a now-or-never decision. The results suggest that welfare analysts should take care to accurately represent the potential for future learning.

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Publisher Info
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 03-wp327.

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Date of creation: Mar 2003
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Handle: RePEc:ias:cpaper:03-wp327

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Related research
Keywords: Clear Lake; contingent valuation; water quality; willingness to pay.;

Find related papers by JEL classification:
Q26 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Recreational Aspects of Natural Resources
C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
D60 - Microeconomics - - Welfare Economics - - - General

References listed on IDEAS
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  1. Kip Viscusi, W., 1985. "Environmental policy choice with an uncertain chance of irreversibility," Journal of Environmental Economics and Management, Elsevier, vol. 12(1), pages 28-44, March. [Downloadable!] (restricted)
  2. John Loomis & Armando Gonzalez-Caban & Robin Gregory, 1994. "Do Reminders of Substitutes and Budget Constraints Influence Contingent Valuation Estimates?," Land Economics, University of Wisconsin Press, vol. 70(4), pages 499-506. [Downloadable!] (restricted)
  3. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December. [Downloadable!] (restricted)
  4. Carol Mansfield, 1999. "Despairing Over Disparities: Explaining the Difference Between Willingness to Pay and Willingness to Accept," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 13(2), pages 219-234, March. [Downloadable!] (restricted)
  5. Blomquist, Glenn C. & Whitehead, John C., 1998. "Resource quality information and validity of willingness to pay in contingent valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 179-196, June. [Downloadable!] (restricted)
  6. Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May. [Downloadable!] (restricted)
  7. Cameron, Trudy Ann, 1988. "A new paradigm for valuing non-market goods using referendum data: Maximum likelihood estimation by censored logistic regression," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 355-379, September. [Downloadable!] (restricted)
  8. Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January. [Downloadable!] (restricted)
  9. John A. List, 2001. "Do Explicit Warnings Eliminate the Hypothetical Bias in Elicitation Procedures? Evidence from Field Auctions for Sportscards," American Economic Review, American Economic Association, vol. 91(5), pages 1498-1507, December. [Downloadable!] (restricted)
  10. 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)
  11. Ronald G. Cummings & Laura O. Taylor, 1999. "Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method," American Economic Review, American Economic Association, vol. 89(3), pages 649-665, June. [Downloadable!] (restricted)
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