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Probability Pricing

Author

Listed:
  • Eduardo D‡vila

    (Yale University)

  • Cecilia Parlatore

    (NYU)

  • Ansgar Walther

    (ICL)

Abstract

This paper develops probability pricing, extending cash flow pricing to quantify the willingness to pay for changes in probabilities. We show that the value of any marginal change in probabilities can be expressed as a standard asset-pricing formula with hypothetical cash flows derived from changes in the survival function. This equivalence between probability and cash flow valuation allows us to construct hedging strategies and systematically decompose individual and aggregate willingness-to-pay. Four applications examine the valuation of changes in the distribution of aggregate consumption, the efficiency effects of varying performance precision in principal-agent problems, and the welfare implications of public and private information.

Suggested Citation

  • Eduardo D‡vila & Cecilia Parlatore & Ansgar Walther, 2025. "Probability Pricing," Cowles Foundation Discussion Papers 2473, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2473
    as

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    File URL: https://cowles.yale.edu/sites/default/files/2025-11/d2473.pdf
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    References listed on IDEAS

    as
    1. Robert J. Aumann & Roberto Serrano, 2008. "An Economic Index of Riskiness," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 810-836, October.
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    3. Richard Courant & Fritz John, 1989. "Introduction to Calculus and Analysis," Springer Books, Springer, number 978-1-4613-8955-2, January.
    4. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    5. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    6. Richard Courant & Fritz John, 1989. "Introduction to Calculus and Analysis," Springer Books, Springer, number 978-1-4613-8958-3, January.
    Full references (including those not matched with items on IDEAS)

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