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Willingness-to-Pay, Compensating Variation, and the Cost of Commitment

Author

Listed:
  • Zhao, Jinhua
  • Kling, Catherine L.

Abstract

We present a dynamic model of an agent's decision to purchase or sell a good under conditions of uncertainty, irreversibility, and learning over time. Her WTP contains both the intrinsic value of the good and a commitment cost associated with delaying the decision until more information is available. Consequently, the standard Hicksian equivalence between WTP/WTA and compensating and equivalent variation no longer holds. This finding has important practical implications as it implies that observed WTP values are not always appropriate for welfare analysis.

Suggested Citation

  • Zhao, Jinhua & Kling, Catherine L., 2000. "Willingness-to-Pay, Compensating Variation, and the Cost of Commitment," Hebrew University of Jerusalem Archive 18357, Hebrew University of Jerusalem.
    • Handle: RePEc:ags:hebarc:18357
    DOI: 10.22004/ag.econ.18357
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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