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Do People Always Pay Less Than They Say? Testbed Laboratory Experiments With IV and HG Values

  • Jacquemet, Nicolas
  • Joule, Robert-Vincent
  • Luchini, Stéphane
  • Shogren, Jason F.

Hypothetical bias is a long-standing issue in stated preference and contingent valuation studies—people tend to overstate their preferences when they do not experience the real monetary consequences of their decision. This view, however, has been challenged by recent evidence based on the elicitation of induced values (IV) in the lab and homegrown (HG) demand function from different countries. This paper uses an experimental design to assess the extent and relevance of hypothetical bias in demand elicitation exercises for both induced (IV) and homegrown (HG) values. For testbed purpose, we use a classic second-price auction to elicit preferences. Comparing the demand curve we elicit in both, hypothetical bias unambiguously (i) vanishes in an IV, private good context and (ii) persists in HG values elicitation context. This suggests hypothetical bias in preference elicitation appears to be driven by “preference formation” rather than “preference elicitation.” In addition, companion treatments highlight two sources of the discrepancy observed in the HG setting: the hypothetical context leads bidders to underestimate the constraints imposed by their budget limitations, whereas the real context creates pressure leading them to bid “zero” to opt out from the elicitation mechanism. As a result, there is a need for a demand elicitation procedure that helps subjects take the valuation exercise sincerely, but without putting extra pressure on them.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/9717.

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Date of creation: 2011
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Publication status: Published in Journal of Public Economic Theory, 2011, Vol. 13, no. 5. pp. 857-882.Length: 25 pages
Handle: RePEc:dau:papers:123456789/9717
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  1. Taylor, Laura O. & McKee, Michael & Laury, Susan K. & Cummings, Ronald G., 2001. "Induced-value tests of the referendum voting mechanism," Economics Letters, Elsevier, vol. 71(1), pages 61-65, April.
  2. Rolando Guzman & Charles Kolstad, 2007. "Researching Preferences, Valuation and Hypothetical Bias," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(3), pages 465-487, July.
  3. John List & Craig Gallet, 2001. "What Experimental Protocol Influence Disparities Between Actual and Hypothetical Stated Values?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(3), pages 241-254, November.
  4. James J. Murphy & Thomas H. Stevens & Lava Yadav, 2010. "A Comparison of Induced Value and Home-Grown Value Experiments to Test for Hypothetical Bias in Contingent Valuation," Working Papers 2010-06, University of Alaska Anchorage, Department of Economics.
  5. Collins, Jill P. & Vossler, Christian A., 2009. "Incentive compatibility tests of choice experiment value elicitation questions," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 226-235, September.
  6. Yohei Mitani & Nicholas E. Flores, 2009. "Demand Revelation, Hypothetical Bias, and Threshold Public Goods Provision," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(2), pages 231-243, October.
  7. Jason Shogren & John List, 1998. "Calibration of the difference between actual and hypothetical valuations in a field experiment," Natural Field Experiments 00296, The Field Experiments Website.
  8. Nicolas Jacquemet & Robert-Vincent Joule & Stephane Luchini & Jason Shogren, 2009. "Earned wealth, engaged bidders? Evidence from a second price auction," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00429894, HAL.
  9. Glenn Harrison, 2006. "Experimental Evidence on Alternative Environmental Valuation Methods," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 34(1), pages 125-162, 05.
  10. Mariah D. Ehmke & Jayson L. Lusk & John A. List, 2008. "Is Hypothetical Bias a Universal Phenomenon? A Multinational Investigation," Land Economics, University of Wisconsin Press, vol. 84(3), pages 489-500.
  11. James Murphy & Thomas Stevens & Darryl Weatherhead, 2005. "Is Cheap Talk Effective at Eliminating Hypothetical Bias in a Provision Point Mechanism?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(3), pages 327-343, 03.
  12. Todd L. Cherry & Peter Frykblom & John List & Jason Shogren & Melonie Williams, 2002. "Laboratory Testbeds and Nonmarket Valuation: The Case of Bidding Behavior in a Second Price Auction with an Outside Option," Working Papers 02-13, Department of Economics, Appalachian State University.
  13. Craig Landry & John List, 2007. "Using ex ante approaches to obtain credible signals for value in contingent markets: Evidence from the field," Framed Field Experiments 00168, The Field Experiments Website.
  14. Schlapfer, Felix, 2008. "Contingent valuation: A new perspective," Ecological Economics, Elsevier, vol. 64(4), pages 729-740, February.
  15. Anthony Burton & Katherine Carson & Susan Chilton & W. Hutchinson, 2007. "Resolving questions about bias in real and hypothetical referenda," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(4), pages 513-525, December.
  16. repec:hal:wpaper:halshs-00277283 is not listed on IDEAS
  17. Christian Vossler & Michael McKee, 2006. "Induced-Value Tests of Contingent Valuation Elicitation Mechanisms," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 35(2), pages 137-168, October.
  18. Johannesson, Magnus, et al, 1999. "Calibrating Hypothetical Willingness to Pay Responses," Journal of Risk and Uncertainty, Springer, vol. 18(1), pages 21-32, April.
  19. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, vol. 16(1), pages 8-37, 03.
  20. 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.
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