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An experimental investigation of the disparity between WTA and WTP for lotteries

  • Schmidt, Ulrich
  • Traub, Stefan

In this paper we experimentally investigate the disparity between willingness-to-accept (WTA) and willingness-to-pay (WTP) for risky lotteries. The direction of the income effect is reversed by endowing subjects with the highest price of a lottery when asking the WTP question. Our results show that the income effect is too small to be the only source of the disparity. Since the disparity concentrates on a subsample of subjects, parametric and nonparametric tests of the WTA-WTP ratio may lead to contradictory results. The disparity is significantly reduced when background risk is introduced. That is, putting subjects always into a risky position could improve the contingent valuation method, which is often concerned with the assessment of risky situations such as health risks, automobile safety, etc.

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Paper provided by Kiel Institute for the World Economy (IfW) in its series Open Access Publications from Kiel Institute for the World Economy with number 28786.

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Date of creation: 2009
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Handle: RePEc:zbw:ifwkie:28786
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