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Hedonic preferences, symmetric loss aversion and the willingness to pay-willingness to accept gap

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Author Info
Fosgerau, Mogens

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Abstract

The results in this paper are relevant for the application of valuation studies in cost-benefit analysis in the presence of the willingness to pay - willingness to accept gap. We consider a consumer who makes choices based on choice preferences exhibiting reference-dependence and loss aversion. Choice preferences are related to underlying hedonic preferences through the marginal rates of substitution (MRS) at the reference. Our issue is the identification of hedonic preferences relevant to welfare economic analysis. We show that the hedonic MRS is identified from reference-dependent choices if loss aversion exhibits a certain symmetry. Moreover, we show that this symmetry is rational in the sense that it leads to maximal expected hedonic utility when choices are made under reference-dependent choice preferences.

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File URL: http://mpra.ub.uni-muenchen.de/10041/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10041.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:10041

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Related research
Keywords: Behavioral public economics; valuation of non-market goods; prospect theory; loss aversion;

Find related papers by JEL classification:
D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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References listed on IDEAS
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  1. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01. [Downloadable!] (restricted)
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  2. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April. [Downloadable!] (restricted)
  3. De Borger, Bruno & Fosgerau, Mogens, 2008. "The trade-off between money and travel time: A test of the theory of reference-dependent preferences," Journal of Urban Economics, Elsevier, vol. 64(1), pages 101-115, July. [Downloadable!] (restricted)
  4. John A. List, 2003. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," NBER Working Papers 9736, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," NBER Working Papers 11518, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November. [Downloadable!] (restricted)
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  7. Horowitz, John K. & McConnell, K. E., 2003. "Willingness to accept, willingness to pay and the income effect," Journal of Economic Behavior & Organization, Elsevier, vol. 51(4), pages 537-545, August. [Downloadable!] (restricted)
  8. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
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