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

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  • Traub, Stefan
  • Schmidt, Ulrich

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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Bibliographic Info

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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Keywords: WTA-WTP disparity; lotteries; background risk; contingent valuation;

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Citations

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Cited by:
  1. John D Hey & Andrea Morone & Ulrich Schmidt, 2007. "Noise and Bias in Eliciting Preferences," Discussion Papers, Department of Economics, University of York 07/04, Department of Economics, University of York.
  2. Kontek, Krzysztof, 2010. "Estimation of Peaked Densities Over the Interval [0,1] Using Two-Sided Power Distribution: Application to Lottery Experiments," MPRA Paper 22378, University Library of Munich, Germany.
  3. Raphaël Giraud, 2010. "On the interpretation of the WTP/WTA gap as imprecise utility: an axiomatic analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 692-701.
  4. Kontek, Krzysztof, 2010. "Classifying Behaviors in Risky Choices," MPRA Paper 23845, University Library of Munich, Germany.
  5. Raphaël Giraud, 2012. "Money matters: an axiomatic theory of the endowment effect," Economic Theory, Springer, Springer, vol. 50(2), pages 303-339, June.
  6. Chen Li & Zhihua Li & Peter Wakker, 2014. "If nudge cannot be applied: a litmus test of the readers’ stance on paternalism," Theory and Decision, Springer, Springer, vol. 76(3), pages 297-315, March.
  7. Kontek, Krzysztof, 2010. "Mean, Median or Mode? A Striking Conclusion From Lottery Experiments," MPRA Paper 21758, University Library of Munich, Germany.
  8. Stefan T. Trautmann & Ulrich Schmidt, 2011. "Pricing risk and ambiguity: The effect of perspective taking," Kiel Working Papers 1727, Kiel Institute for the World Economy.
  9. Kontek, Krzysztof, 2010. "Density Based Regression for Inhomogeneous Data: Application to Lottery Experiments," MPRA Paper 22268, University Library of Munich, Germany.
  10. Shosh Shahrabani & Uri Benzion & Tal Shavit, 2008. "WTP and WTA in competitive and non-competitive environments," Judgment and Decision Making, Society for Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3, pages 153-161, February.
  11. Trautmann, Stefan T. & Traxler, Christian, 2010. "Reserve prices as reference points - Evidence from auctions for football players at Hattrick.org," Journal of Economic Psychology, Elsevier, Elsevier, vol. 31(2), pages 230-240, April.
  12. Tibor Neugebauer, 2010. "Moral Impossibility in the Petersburg Paradox : A Literature Survey and Experimental Evidence," LSF Research Working Paper Series, Luxembourg School of Finance, University of Luxembourg 10-14, Luxembourg School of Finance, University of Luxembourg.
  13. Roth, Gerrit, 2006. "Predicting the Gap between Willingness to Accept and Willingness to Pay," Munich Dissertations in Economics, University of Munich, Department of Economics 4901, University of Munich, Department of Economics.
  14. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Working Paper Series of the Max Planck Institute for Research on Collective Goods, Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.

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