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Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value

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  • Jack L. Knetsch
  • J. A. Sinden

Abstract

Aside from possible income effects, measures of the maximum amounts people will pay to avoid a loss and the minimum compensation necessary for them to accept it are generally assumed to be equivalent. Unexpectedly wide variations between these sums, however, have been noted in survey responses to hypothetical options. This paper reports the results of a series of experiments that confronted people with actual money payments and cash compensations. The results indicate that the compensation measure of value seems to exceed significantly the willingness to pay measure, which would appear to call into some question various rules of entitlement, damage assessments, and interpretations of indifference curves.

Suggested Citation

  • Jack L. Knetsch & J. A. Sinden, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, Oxford University Press, vol. 99(3), pages 507-521.
  • Handle: RePEc:oup:qjecon:v:99:y:1984:i:3:p:507-521.
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    References listed on IDEAS

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    1. Rowe, Robert D. & D'Arge, Ralph C. & Brookshire, David S., 1980. "An experiment on the economic value of visibility," Journal of Environmental Economics and Management, Elsevier, vol. 7(1), pages 1-19, March.
    2. Philip A. Meyer, 1979. "Publicly Vested Values for Fish and Wildlife: Criteria in Economic Welfare and Interface with the Law," Land Economics, University of Wisconsin Press, vol. 54(2), pages 223-235.
    3. T. de Scitovszky, 1941. "A Note on Welfare Propositions in Economics," Review of Economic Studies, Oxford University Press, vol. 9(1), pages 77-88.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    5. William D. Schulze & Ralph C. d'Arge & David S. Brookshire, 1981. "Valuing Environmental Commodities: Some Recent Experiments," Land Economics, University of Wisconsin Press, vol. 57(2), pages 151-172.
    6. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
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