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Real Options and the WTP/WTA Disparity

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Abstract

Presents a real options model of an agent's decision to purchase or sell a good under conditions of uncertainty, irreversibility, and learning over time. The agent's willingness to pay (WTP) and willingness to accept (WTA) contain both the intrinsic value of the good and an option value associated with delaying the decision until more information is available. The model explicitly demonstrates the effect that timing of an action can have on welfare measurement.

Suggested Citation

  • Jinhua Zhao & Catherine L. Kling, 1998. "Real Options and the WTP/WTA Disparity," Center for Agricultural and Rural Development (CARD) Publications 99-wp206, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:99-wp206
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    References listed on IDEAS

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    1. Zhao, Jinhua & Zilberman, David & Heiman, Amir & McWilliams, Bruce, 2002. "Modeling Money-Back Guarantees As Financial Options," Staff General Research Papers Archive 5206, Iowa State University, Department of Economics.
    2. Ian Bateman & Alistair Munro & Bruce Rhodes & Chris Starmer & Robert Sugden, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 479-505.
    3. Kolstad, Charles D. & Guzman, Rolando M., 1999. "Information and the Divergence between Willingness to Accept and Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, vol. 38(1), pages 66-80, July.
    4. Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, vol. 23(2), pages 97-109, April.
    5. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    6. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
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    Cited by:

    1. Richard Carson & Nicholas Flores & Norman Meade, 2001. "Contingent Valuation: Controversies and Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 173-210.
    2. List, John A., 2004. "Substitutability, experience, and the value disparity: evidence from the marketplace," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 486-509, May.

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