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An Experimental Investigation of the Disparity between WTA and WTP for Lotteries

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Schmidt, Ulrich
Traub, Stefan

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Abstract

In this paper we experimentally investigate the disparity between willingness-to-accept (WTA) and willingness-to-pay (WTP) for risky lotteries. The direction of the income effect is reversed by endowing subjects with the highest price of a lottery when asking the WTP question. Our results show that the income effect is too small to be the only source of the disparity. Since the disparity concentrates on a subsample of subjects, parametric and nonparametric tests of the WTA-WTP ratio may lead to contradictory results. The disparity is significantly reduced when background risk is introduced. That is, putting subjects always into a risky position could improve the contingent valuation method which is often concerned with the assessment of risky situations such as health risks, automobile safety, etc.

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Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics working papers with number 2006,09.

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Date of creation: 2006
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Handle: RePEc:zbw:cauewp:4760

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Web page: http://www.wiso.uni-kiel.de/econ/

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Related research
Keywords: WTA-WTP disparity lotteries background risk contingent valuation

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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  19. Borges, Bernhard F. J. & Knetsch, Jack L., 1998. "Tests of market outcomes with asymmetric valuations of gains and losses: Smaller gains, fewer trades, and less value," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 185-193, January. [Downloadable!] (restricted)
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