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Experimental Evidence on the Divergence Between Measures of Willingness to Pay and Willingness to Accept--The Role of Value Uncertainty

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  • Peter R. Mueser
  • Jay K. Dow

Abstract

One of the most robust findings in experimental analysis in economics is that subjects often display a large discrepancy between the dollar value they are willing to accept in order to sell an item (WTA) and the dollar value they are willing to pay to purchase it (WTP). We suggest that often when individuals face purchase or sale decisions, the actual private value of an object is uncertain. This is significant because, in a large number of market environments, such uncertainty will cause individuals to display a disparity between WTA and WTP. Our review of the literature confirms that the WTA-WTP disparity does tend to grow where we might expect that estimating an object's value is more difficult. We then turn to our own experiments that attempt to measure such uncertainty more directly and examine how it relates to the WTA-WTP disparity. Our results confirm the hypothesis of a positive relationship.

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Bibliographic Info

Paper provided by EconWPA in its series Experimental with number 9803001.

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Length: 26 pages
Date of creation: 28 Mar 1998
Date of revision:
Handle: RePEc:wpa:wuwpex:9803001

Note: 26 pages (title page, abstract page, 21 numbered pages, 3 tables), WordPerfect 6.1
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  1. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  2. Steffen Huck & Georg Kirchsteiger & Jörg Oechssler, 2003. "Learning to Like What You Have - Explaining the Endowment Effect," Bonn Econ Discussion Papers bgse5_2003, University of Bonn, Germany.
  3. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December.
  4. Knetsch, Jack L, 1995. "Asymmetric Valuation of Gains and Losses and Preference Order Assumptions," Economic Inquiry, Western Economic Association International, vol. 33(1), pages 134-41, January.
  5. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
  6. Shogren, Jason F. & Shin, Seung Youll & Hayes, Dermot J. & Kliebenstein, James, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," Staff General Research Papers 701, Iowa State University, Department of Economics.
  7. Cummings, Ronald G & Harrison, Glenn W & Rutstrom, E Elisabet, 1995. "Homegrown Values and Hypothetical Surveys: Is the Dichotomous Choice Approach Incentive-Compatible?," American Economic Review, American Economic Association, vol. 85(1), pages 260-66, March.
  8. Knez, Peter & Smith, Vernon L & Williams, Arlington W, 1985. "Individual Rationality, Market Rationality, and Value Estimation," American Economic Review, American Economic Association, vol. 75(2), pages 397-402, May.
  9. John H. Kagel & Colin M. Campbell & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March.
  10. 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.
  11. Coursey, Don L & Hovis, John L & Schulze, William D, 1987. "The Disparity between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 679-90, August.
  12. Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
  13. 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, vol. 77(4), pages 554-66, September.
  14. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
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Cited by:
  1. Dennis Dittrich & Werner Güth & Boris Maciejovsky, . "Overconfidence in Investment Decisions: An Experimental Approach," Papers on Strategic Interaction 2001-03, Max Planck Institute of Economics, Strategic Interaction Group.

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