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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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    1. John C. Bergstrom & John R. Stoll & Alan Randall, 1990. "The Impact of Information on Environmental Commodity Valuation Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 614-621.
    2. John Loomis & Armando Gonzalez-Caban & Robin Gregory, 1994. "Do Reminders of Substitutes and Budget Constraints Influence Contingent Valuation Estimates?," Land Economics, University of Wisconsin Press, vol. 70(4), pages 499-506.
    3. 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.
    4. 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.
    5. 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.
    6. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
    7. 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.
    8. 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.
    9. Karl C. Samples & John A. Dixon & KMarcia M. Gowen, 1986. "Information Disclosure and Endangered Species Valuation," Land Economics, University of Wisconsin Press, vol. 62(3), pages 306-312.
    10. 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.
    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.
    13. Horowitz, John K. & McConnell, K. E., 2003. "Willingness to accept, willingness to pay and the income effect," Journal of Economic Behavior & Organization, Elsevier, vol. 51(4), pages 537-545, August.
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Parsons, George R. & Myers, Kelley, 2016. "Fat tails and truncated bids in contingent valuation: An application to an endangered shorebird species," Ecological Economics, Elsevier, vol. 129(C), pages 210-219.
    5. John K. Horowitz & Kenneth E. McConnell & James J. Murphy, 2013. "Behavioral foundations of environmental economics and valuation," Chapters,in: Handbook on Experimental Economics and the Environment, chapter 4, pages 115-156 Edward Elgar Publishing.
    6. repec:bla:ecinqu:v:55:y:2017:i:1:p:383-396 is not listed on IDEAS
    7. repec:elg:eechap:17527_2 is not listed on IDEAS
    8. 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.
    9. 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.
    10. repec:sss:wpaper:201405 is not listed on IDEAS
    11. 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.
    12. 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;Agricultural and Applied Economics Association.
    13. repec:spr:envpol:v:20:y:2018:i:1:d:10.1007_s10018-017-0191-8 is not listed on IDEAS

    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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