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A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity

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Author Info

  • Kling, Catherine L.
  • List, John
  • Zhao, Jinhua

Abstract

Evidence from laboratory experiments suggests that important disparities exist between willingness to pay (WTP) and compensation demanded for the same good. This study advances, and experimentally tests, a new explanation of the WTP/WTA disparity—a dynamic theory based on the presence of commitment costs. We find that the commitment cost theory combined with a simple behavioral anomaly is able to lend insights into the causes and severity of the WTA/WTP disparity. Further, we find that market experience attenuates the behavioral anomaly, consistent with the notion that no value disparity exists for agents with sufficient market experience.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 33896.

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Date of creation: 17 Aug 2011
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Publication status: Forthcoming in Economic Inquiry
Handle: RePEc:isu:genres:33896

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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References

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  1. James Konow, 2000. "Fair Shares: Accountability and Cognitive Dissonance in Allocation Decisions," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 1072-1091, September.
  2. Shogren, Jason F. & Margolis, Michael & Koo, Cannon & List, John A., 2001. "A random nth-price auction," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 46(4), pages 409-421, December.
  3. Knez, Peter & Smith, Vernon L & Williams, Arlington W, 1985. "Individual Rationality, Market Rationality, and Value Estimation," American Economic Review, American Economic Association, American Economic Association, vol. 75(2), pages 397-402, May.
  4. John List, 2003. "Does market experience eliminate market anomalies?," Natural Field Experiments, The Field Experiments Website 00297, The Field Experiments Website.
  5. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1636-1643, December.
  6. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, Elsevier, vol. 73(3), pages 293-300, December.
  7. Jinhua Zhao & Catherine L. Kling, 2000. "Willingness-to-Pay, Compensating Variation, and the Cost of Commitment," Center for Agricultural and Rural Development (CARD) Publications 00-wp251, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  8. Horowitz, John K. & McConnell, K. E., 2003. "Willingness to accept, willingness to pay and the income effect," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 51(4), pages 537-545, August.
  9. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 554-66, September.
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As found on the RePEc Biblio, the curated bibliography for Economics:
  1. > Environmental and Natural Resource Economics > Environmental Economics > Valuation > Contingent valuation method > Willingness to pay versus willingness to accept
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Cited by:
  1. Lunn, Pete & Lunn, Mary, 2014. "A Computational Theory of Willingness to Exchange," Papers, Economic and Social Research Institute (ESRI) WP477, Economic and Social Research Institute (ESRI).
  2. Lunn,Pete & Lunn, Mary, 2014. "What Can I Get For It? The Relationship Between the Choice Equivalent, Willingness to Accept and Willingness to Pay," Papers, Economic and Social Research Institute (ESRI) WP479, Economic and Social Research Institute (ESRI).
  3. John A. List & Michael K. Price, 2013. "Using Field Experiments in Environmental and Resource Economics," NBER Working Papers 19289, National Bureau of Economic Research, Inc.

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