A comparison of prospect theory in WTP and preference space
AbstractThe importance of willingness to pay (WTP) and willingness to accept (WTA) measures in the evaluation of policy measures has led to a constant stream of research examining survey methods and model specifications seeking to capture and explain the concept of marginal rates of substitution as much as possible. Stated choice experiments pivoted around a reference alternative allow the specification of discrete choice models to accommodate the prospect theory reference dependence assumption. This permits an investigation of theories related to loss aversion and diminishing sensitivity, and to test the discrepancy between WTP and WTA, widely documented within the literature. With more advanced classes of discrete choice models at our disposal, it is now possible to test different preference specifications that are better able to measure WTP and WTA values. One such model allowing for utility to be directly specified in WTP space has recently shown interesting qualities. This paper compares and contrasts models estimated in preference space to those estimated in WTP space allowing for asymmetry in the marginal utilities by estimating different parameters according to reference, gain and loss values. The results suggest a better model fit for the data estimated in WTP space, contradicting the findings of previous researches. The parameter estimates report significant evidence of loss aversion and diminishing sensitivities even though the symmetric specification outperforms the asymmetric ones. Finally, the analysis of the WTP and WTA measures confirms the higher degree of WTA compared to WTP, and highlights the appeal of the WTP space specification in terms of plausibility of the estimated measures.
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Bibliographic InfoPaper provided by USI Università della Svizzera italiana in its series Quaderni della facoltà di Scienze economiche dell'Università di Lugano with number 1006.
Length: 16 pages
Date of creation: Mar 2010
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choice experiments; willingness to pay space; preference asymmetry;
Find related papers by JEL classification:
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-20 (All new papers)
- NEP-CBE-2010-03-20 (Cognitive & Behavioural Economics)
- NEP-DCM-2010-03-20 (Discrete Choice Models)
- NEP-ECM-2010-03-20 (Econometrics)
- NEP-EXP-2010-03-20 (Experimental Economics)
- NEP-UPT-2010-03-20 (Utility Models & Prospect Theory)
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