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Willingness to Pay and the Cost of Commitment: An Empirical Specification and Test

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  • Jay Corrigan

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  • Catherine Kling

    ()

  • Jinhua Zhao

    ()

Abstract

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. In a dynamic setting, however, willingness to pay may also contain a commitment cost. In this paper we incorporate the dynamic nature of the value formation process into a stated preference study designed to test whether there is an important dynamic component (commitment cost) in stated preference values. The results clearly indicate that stated preference values can contain commitment costs and that these can be quite large: respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those facing a now-or-never decision. These results have important consequences for the design and interpretation of stated preference data.
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Suggested Citation

  • Jay Corrigan & Catherine Kling & Jinhua Zhao, 2008. "Willingness to Pay and the Cost of Commitment: An Empirical Specification and Test," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(2), pages 285-298, June.
  • Handle: RePEc:kap:enreec:v:40:y:2008:i:2:p:285-298
    DOI: 10.1007/s10640-007-9153-0
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    References listed on IDEAS

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    4. Jinhua Zhao & Catherine L. Kling, 2004. "Willingness to Pay, Compensating Variation, and the Cost of Commitment," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 503-517, July.
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    6. Jay Corrigan, 2005. "Is the Experimental Auction a Dynamic Market?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 31(1), pages 35-45, May.
    7. Laura O. Taylor & Ronald G. Cummings, 1999. "Unbiased Value Estimates for Environmental Goods: A Cheap Talk Design for the Contingent Valuation Method," American Economic Review, American Economic Association, vol. 89(3), pages 649-665, June.
    8. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
    9. Carol Mansfield, 1999. "Despairing Over Disparities: Explaining the Difference Between Willingness to Pay and Willingness to Accept," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 13(2), pages 219-234, March.
    10. Blomquist, Glenn C. & Whitehead, John C., 1998. "Resource quality information and validity of willingness to pay in contingent valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 179-196, June.
    11. Catherine L. Kling & John A. List & Jinhua Zhao, 2003. "WTP/WTA Disparity: Have We Been Observing Dynamic Values but Interpreting Them as Static?, The," Center for Agricultural and Rural Development (CARD) Publications 03-wp333, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    12. Hanemann, W. Michael, 1989. "Information and the concept of option value," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 23-37, January.
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    Cited by:

    1. Elisabetta Strazzera & Elisabetta Cherchi & Silvia Ferrini, 2008. "A Choice Modelling Approach for Assessment of Use and Quasi-Option Values in Urban Planning for Areas of Environmental Interest," Working Papers 2008.63, Fondazione Eni Enrico Mattei.
    2. Weiwei Liu & Kevin J. Egan, 2019. "A Semiparametric Smooth Coefficient Estimator for Recreation Demand," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 1163-1187, November.
    3. George Parsons & Kelley Myers, 2017. "Fat tails and truncated bids in contingent valuation: an application to an endangered shorebird species," Chapters, in: Daniel McFadden & Kenneth Train (ed.), Contingent Valuation of Environmental Goods, chapter 2, pages 17-42, Edward Elgar Publishing.
    4. Carmelo J. León & Jorge E. Araña, 2012. "The Dynamics of Preference Elicitation after an Environmental Disaster: Stability and Emotional Load," Land Economics, University of Wisconsin Press, vol. 88(2), pages 362-381.
    5. Krüger, Niclas A. & Svensson, Mikael, 2009. "The impact of real options on willingness to pay for mortality risk reductions," Journal of Health Economics, Elsevier, vol. 28(3), pages 563-569, May.
    6. Zhang, Jing & Steiner, Bodo E., 2010. "A Choice-Experiment Based Analysis Of Protection Motivation Theory: Health Related Behavior Of Consumers With Celiac Disease," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116454, European Association of Agricultural Economists.
    7. Mikolaj Czajkowski & Nick Hanley & Jacob LaRiviere, 2015. "The Effects of Experience on Preferences: Theory and Empirics for Environmental Public Goods," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 333-351.
    8. Naresh Nepal & Eric Steltzer & Alok K. Bohara & Kelly Cullen, 2018. "Public values on offshore wind farm," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 225-240, January.
    9. Richard Carson & Theodore Groves, 2007. "Incentive and informational properties of preference questions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 181-210, May.
    10. Egan, Kevin J. & Corrigan, Jay R. & Dwyer, Daryl F., 2015. "Three reasons to use annual payments in contingent valuation surveys: Convergent validity, discount rates, and mental accounting," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 123-136.
    11. John K. Horowitz & Kenneth E. McConnell & James J. Murphy, 2013. "Behavioral foundations of environmental economics and valuation," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 4, pages 115-156, Edward Elgar Publishing.
    12. Claudia Bazzani & Vincenzina Caputo & Rodolfo M. Nayga JR. & Maurizio Canavari, 2017. "Testing Commitment Cost Theory In Choice Experiments," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 383-396, January.
    13. repec:sss:wpaper:201405 is not listed on IDEAS
    14. Gioacchino Pappalardo & Roberta Selvaggi & Salvatore Bracco & Gaetano Chinnici & Biagio Pecorino, 2018. "Factors affecting purchasing process of digestate: evidence from an economic experiment on Sicilian farmers’ willingness to pay," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-12, December.

    More about this item

    Keywords

    Commitment cost; Contigent valuation; Option value; Willingness to pay; Q26; C42; D60;

    JEL classification:

    • Q26 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Recreational Aspects of Natural Resources
    • C42 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Survey Methods
    • D60 - Microeconomics - - Welfare Economics - - - General

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