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A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity

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  • Kling, Catherine L.
  • List, John
  • Zhao, Jinhua

Abstract

Evidence from laboratory experiments suggests that important disparities exist between willingness to pay (WTP) and compensation demanded for the same good. This study advances, and experimentally tests, a new explanation of the WTP/WTA disparity--a dynamic theory based on the presence of commitment costs. We find that the commitment cost theory combined with a simple behavioral anomaly is able to lend insights into the causes and severity of the WTA/WTP disparity. Further, we find that market experience attenuates the behavioral anomaly, consistent with the notion that no value disparity exists for agents with sufficient market experience.
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Suggested Citation

  • Kling, Catherine L. & List, John & Zhao, Jinhua, 2011. "A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity," Staff General Research Papers Archive 33896, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:33896
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    1. Shogren, Jason F. & Margolis, Michael & Koo, Cannon & List, John A., 2001. "A random nth-price auction," Journal of Economic Behavior & Organization, Elsevier, vol. 46(4), pages 409-421, December.
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    6. Zhao, Jinhua & Kling, Catherine L., 2001. "A new explanation for the WTP/WTA disparity," Economics Letters, Elsevier, vol. 73(3), pages 293-300, December.
    7. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 41-71.
    8. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
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    11. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, vol. 92(5), pages 1636-1643, December.
    12. Knez, Peter & Smith, Vernon L & Williams, Arlington W, 1985. "Individual Rationality, Market Rationality, and Value Estimation," American Economic Review, American Economic Association, vol. 75(2), pages 397-402, May.
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    14. Don L. Coursey & John L. Hovis & William D. Schulze, 1987. "The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(3), pages 679-690.
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    Citations

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    Cited by:

    1. Lunn, Pete & Lunn, Mary, 2014. "A Computational Theory of Willingness to Exchange," Papers WP477, Economic and Social Research Institute (ESRI).
    2. Bazzani, Claudia & Caputo, Vincenzina & Nayga, Rodolfo M. & Canavari, Maurizio, 2015. "Testing commitment cost in food choices: a non-hypothetical choice experiment approach," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205235, Agricultural and Applied Economics Association.
    3. Claudia Bazzani & Vincenzina Caputo & Rodolfo M. Nayga JR. & Maurizio Canavari, 2017. "Testing Commitment Cost Theory In Choice Experiments," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 383-396, January.
    4. Lunn,Pete & Lunn, Mary, 2014. "What Can I Get For It? The Relationship Between the Choice Equivalent, Willingness to Accept and Willingness to Pay," Papers WP479, Economic and Social Research Institute (ESRI).
    5. Jha, Pushkar. P. & Bhalla, Ajay, 2018. "Life of a PAI: Mediation by willingness and ability for beneficiary community engagement," World Development Perspectives, Elsevier, vol. 9(C), pages 27-34.
    6. Amoah, Anthony & Ferrini, Silvia & Schaafsma, Marije, 2019. "Electricity outages in Ghana: Are contingent valuation estimates valid?," Energy Policy, Elsevier, vol. 135(C).
    7. John A. List & Michael K. Price, 2013. "Using Field Experiments in Environmental and Resource Economics," NBER Working Papers 19289, National Bureau of Economic Research, Inc.
    8. Lee, Ji Yong & Nayga, Rodolfo M. & Deck, Cary & Drichoutis, Andreas, 2017. "Cognitive Ability and Bidding Behavior in Experimental Auction," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258347, Agricultural and Applied Economics Association.
    9. Yan, Jinming & Yang, Yumeng & Xia, Fangzhou, 2021. "Subjective land ownership and the endowment effect in land markets: A case study of the farmland “three rights separation” reform in China," Land Use Policy, Elsevier, vol. 101(C).
    10. Gioacchino Pappalardo & Roberta Selvaggi & Salvatore Bracco & Gaetano Chinnici & Biagio Pecorino, 2018. "Factors affecting purchasing process of digestate: evidence from an economic experiment on Sicilian farmers’ willingness to pay," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-12, December.
    11. Artem Korzhenevych & Charles Kofi Owusu, 2021. "Renewable Minigrid Electrification in Off-Grid Rural Ghana: Exploring Households Willingness to Pay," Sustainability, MDPI, vol. 13(21), pages 1-17, October.

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    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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