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

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Author Info
Zhao, Jinhua
Kling, Catherine L.

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Abstract

Hicksian welfare theory is static in nature, but many decisions are made in a dynamic environment. We present a dynamic model of an agent's decision to purchase or sell a good under the realistic conditions of uncertainty, irreversibility, and learning over time. Her willingness to pay (WTP) contains both the intrinsic value of the good as in Hicksian theory plus a commitment cost associated with delaying to obtain more information. The Hicksian equivalence between WTP/Willingness to accept (WTA) and compensating and equivalent variations no longer holds. The WTP and WTA divergence may arise and observed WTP values are not always appropriate for welfare analysis.

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Publisher Info
Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1875.

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Date of creation: 20 Sep 2000
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Publication status: Published in Economic Inquiry, July 2004, Vol. 42, No. 3, pp. 503-517.
Handle: RePEc:isu:genres:1875

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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D6 - Microeconomics - - Welfare Economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  14. Zhao, Jinhua & Kling, Catherine L., 1999. "Real Options and the WTP/WTA Disparity," Staff General Research Papers 1313, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  15. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Baylis, Kathy & 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). [Downloadable!]
  2. Corrigan, Jay, 2001. "The Effect of Future Availability of Information on Willingness to Pay," Staff General Research Papers 2023, Iowa State University, Department of Economics. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. Jay Corrigan, 2001. "Effect of Future Availability of Information on Willingness to Pay, The," Center for Agricultural and Rural Development (CARD) Publications 01-wp290, Center for Agricultural and Rural Development (CARD) at Iowa State University. [Downloadable!]
  5. Jay R. Corrigan, 2005. "Is the Experimental Auction a Dynamic Market?," Working Papers 0501, Kenyon College, Department of Economics. [Downloadable!]
    Other versions:
  6. Zhao, Jinhua & Kling, Catherine L., 2002. "Environmental Valuation under Dynamic Consumer Behavior," Staff General Research Papers 2106, Iowa State University, Department of Economics. [Downloadable!]
  7. 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. [Downloadable!]
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