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Uncertainty, Risk Aversion, and WTA vs. WTP

  • Erica Mina Okada

    ()

    (Shidler College of Business, University of Hawaii at Manoa, Honolulu, Hawaii 96822)

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    We examine a previously unstudied category of exchange items in which the true value is unknown to both the buyer and seller at the time of exchange but becomes known to both at a future time after the exchange. Real-world examples of such exchange items as in our study include forward contracts and fixed-fee turnkey contracts. We demonstrate that the discrepancy between the seller's willingness to accept (WTA) and buyer's willingness to pay (WTP) increases with (1) the level of uncertainty about the exchange item's value and (2) the exchange parties' level of risk aversion. In a series of studies, we manipulate and measure the level of uncertainty of the exchange item, measure the level of risk aversion of the exchange parties, and study the respective effects on decreasing the WTP while increasing the WTA.

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    File URL: http://dx.doi.org/10.1287/mksc.1080.0480
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 29 (2010)
    Issue (Month): 1 (01-02)
    Pages: 75-84

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    Handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:75-84
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    1. Simon Gaechter & Eric J. Johnson & Andreas Herrmann, 2010. "Individual-level loss aversion in riskless and risky choices," Discussion Papers 2010-20, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
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    5. repec:ebl:ecbull:v:4:y:2004:i:1:p:1-7 is not listed on IDEAS
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    14. Kolstad, Charles D. & Guzman, Rolando M., 1999. "Information and the Divergence between Willingness to Accept and Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, vol. 38(1), pages 66-80, July.
    15. Dhananjay Nayakankuppam & Himanshu Mishra, 2005. "The Endowment Effect: Rose-Tinted and Dark-Tinted Glasses," Journal of Consumer Research, Oxford University Press, vol. 32(3), pages 390-395, December.
    16. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-38, September.
    17. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
    18. 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.
    19. 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.
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