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Predicting the Gap between Willingness to Accept and Willingness to Pay

  • Roth, Gerrit
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    People report much larger willingness to accept (WTA) than willingness to pay (WTP) under a broad range of circumstances. This dissertation tries to answer the question when people will report this gap, how large the difference between the two answers will be and what reasons lie behind this behavior: We find that uncertainty about the desire to trade a good lies at the heart of the gap measured in experiments. A formal model extending Prospect Theory by “aversion to risk changes” predicts that the endowment effect increases with uncertainty. Data from our own behavioral experiment confirms the uncertainty hypothesis. When applied to a different phenomenon, so-called “Preference Reversal”, the model can predict when different types of the observed reversals occur, closing an explanatory gap that other theories have left open.

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    File URL: http://edoc.ub.uni-muenchen.de/4901/1/Roth_Gerrit.pdf
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    Paper provided by University of Munich, Department of Economics in its series Munich Dissertations in Economics with number 4901.

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    Date of creation: 23 Jan 2006
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    Handle: RePEc:lmu:dissen:4901
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    1. Ortona, Guido & Scacciati, Francesco, 1992. "New experiments on the endowment effect," Journal of Economic Psychology, Elsevier, vol. 13(2), pages 277-296, June.
    2. Levy-Garboua, L. & Montmarquette, C., 1996. "Cognition in Seemingly Riskless Choices and Judgments," Cahiers de recherche 9602, Universite de Montreal, Departement de sciences economiques.
    3. Jason Shogren & John List, 2002. "Calibration of willingness-to-accept," Framed Field Experiments 00182, The Field Experiments Website.
    4. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc.
    5. Grether, David M. & Plott, Charles R., . "Economic Theory of Choice and the Preference Reversal Phenomenon," Working Papers 152, California Institute of Technology, Division of the Humanities and Social Sciences.
    6. Traub, Stefan & Schmidt, Ulrich, 2006. "An Experimental Investigation of the Disparity between WTA and WTP for Lotteries," Economics Working Papers 2006,09, Christian-Albrechts-University of Kiel, Department of Economics.
    7. Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," American Economic Review, American Economic Association, vol. 84(1), pages 255-70, March.
    8. Brigitte C. Madrian & Dennis F. Shea, 2000. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," NBER Working Papers 7682, National Bureau of Economic Research, Inc.
    9. Brown, Thomas C., 2005. "Loss aversion without the endowment effect, and other explanations for the WTA-WTP disparity," Journal of Economic Behavior & Organization, Elsevier, vol. 57(3), pages 367-379, July.
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    12. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, vol. 77(4), pages 554-66, September.
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    14. Praveen Kujal & Vernon L. Smith, 2003. "The Endowment Effect," Economics Working Papers we036226, Universidad Carlos III, Departamento de Economía.
    15. H. Lorne Carmichael & W. Bentley Macleod, 2006. "Welfare Economics with Intransitive Revealed Preferences: A Theory of the Endowment Effect," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(2), pages 193-218, 05.
    16. Bradley Jorgensen & Geoffrey Syme & Brian Bishop & Blair Nancarrow, 1999. "Protest Responses in Contingent Valuation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 14(1), pages 131-150, July.
    17. Loomes, Graham & Starmer, Chris & Sugden, Robert, 1992. "Are Preferences Monotonic? Testing Some Predictions of Regret Theory," Economica, London School of Economics and Political Science, vol. 59(233), pages 17-33, February.
    18. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
    19. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    20. van de Ven, Niels & Zeelenberg, Marcel & van Dijk, Eric, 2005. "Buying and selling exchange goods: Outcome information, curiosity and the endowment effect," Journal of Economic Psychology, Elsevier, vol. 26(3), pages 459-468, June.
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