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The Dynamic Formation Of Willingness To Pay: An Empirical Specification And Test

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  • Corrigan, Jay R.
  • Kling, Catherine L.
  • Zhao, Jinhua

Abstract

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. However, in a dynamic setting characterized by uncertainty, irreversibility, and the potential for learning, willingness to pay may also contain an option value. In this paper, we incorporate the dynamic nature of the value formulation process into a study using a contingent valuation method, designed to measure the value local residents assign to a north-central Iowa lake. Our results show that willingness to pay is highly sensitive to the potential for future learning. 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 who faced a now-or-never decision. The results suggest that welfare analysts should take care to accurately represent the potential for future learning.

Suggested Citation

  • Corrigan, Jay R. & Kling, Catherine L. & Zhao, Jinhua, 2003. "The Dynamic Formation Of Willingness To Pay: An Empirical Specification And Test," Hebrew University of Jerusalem Archive 18546, Hebrew University of Jerusalem.
    • Handle: RePEc:ags:hebarc:18546
    DOI: 10.22004/ag.econ.18546
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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.
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    3. 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.
    4. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
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    6. 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.
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    Keywords

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    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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