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

  • Ulrich Schmidt

    ()

  • Stefan Traub

    ()

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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File URL: http://hdl.handle.net/10.1007/s11238-007-9062-2
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Article provided by Springer in its journal Theory and Decision.

Volume (Year): 66 (2009)
Issue (Month): 3 (March)
Pages: 229-262

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Handle: RePEc:kap:theord:v:66:y:2009:i:3:p:229-262
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100341

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