IDEAS home Printed from https://ideas.repec.org/p/zbw/ifwkie/28786.html
   My bibliography  Save this paper

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

Author

Listed:
  • Schmidt, Ulrich
  • Traub, Stefan

Abstract

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.

Suggested Citation

  • Schmidt, Ulrich & Traub, Stefan, 2009. "An experimental investigation of the disparity between WTA and WTP for lotteries," Open Access Publications from Kiel Institute for the World Economy 28786, Kiel Institute for the World Economy (IfW).
    • Handle: RePEc:zbw:ifwkie:28786
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/28786/1/592397769.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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 255-270, March.
    2. Harless, David W., 1989. "More laboratory evidence on the disparity between willingness to pay and compensation demanded," Journal of Economic Behavior & Organization, Elsevier, vol. 11(3), pages 359-379, May.
    3. Jack L. Knetsch & J. A. Sinden, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, Oxford University Press, vol. 99(3), pages 507-521.
    4. McDaniels, Timothy L, 1992. "Reference Points, Loss Aversion, and Contingent Values for Auto Safety," Journal of Risk and Uncertainty, Springer, vol. 5(2), pages 187-200, May.
    5. Hartman, Raymond S. & Donae, Michael J. & Woo, Chi-Keung, 1990. "Status quo bias in the measurement of value of service," Resources and Energy, Elsevier, vol. 12(2), pages 197-214, July.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    7. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    8. Knetsch, Jack L., 1992. "Preferences and nonreversibility of indifference curves," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 131-139, January.
    9. Knetsch, Jack L., 1990. "Environmental policy implications of disparities between willingness to pay and compensation demanded measures of values," Journal of Environmental Economics and Management, Elsevier, vol. 18(3), pages 227-237, May.
    10. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    11. 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.
    12. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    13. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-1284, December.
    14. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    15. Gwendolyn Morrison, 1997. "Willingness to pay and willingness to accept: some evidence of an endowment effect," Applied Economics, Taylor & Francis Journals, vol. 29(4), pages 411-417.
    16. Jack L. Knetsch, 1995. "Assumptions, behavioral findings, and policy analysis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 14(1), pages 68-78.
    17. Graham Loomes & Chris Starmer & Robert Sugden, 2003. "Do Anomalies Disappear in Repeated Markets?," Economic Journal, Royal Economic Society, vol. 113(486), pages 153-166, March.
    18. Borges, Bernhard F. J. & Knetsch, Jack L., 1998. "Tests of market outcomes with asymmetric valuations of gains and losses: Smaller gains, fewer trades, and less value," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 185-193, January.
    19. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-597, September.
    20. 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.
    21. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    22. Raymond S. Hartman & Michael J. Doane & Chi-Keung Woo, 1991. "Consumer Rationality and the Status Quo," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 141-162.
    23. Dubourg, W R & Jones-Lee, M W & Loomes, Graham, 1994. "Imprecise Preferences and the WTP-WTA Disparity," Journal of Risk and Uncertainty, Springer, vol. 9(2), pages 115-133, October.
    24. 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, Oxford University Press, vol. 102(3), pages 679-690.
    25. Peter Fishburn, 1980. "A simple model for the utility of gambling," Psychometrika, Springer;The Psychometric Society, vol. 45(4), pages 435-448, December.
    26. Jack L. Knetsch & J. A. Sinden, 1987. "The Persistence of Evaluation Disparities," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 691-695.
    27. Eisenberger, Roselies & Weber, Martin, 1995. "Willingness-to-Pay and Willingness-to-Accept for Risky and Ambiguous Lotteries," Journal of Risk and Uncertainty, Springer, vol. 10(3), pages 223-233, May.
    28. Han Bleichrodt & Ulrich Schmidt, 2002. "A Context-Dependent Model of the Gambling Effect," Management Science, INFORMS, vol. 48(6), pages 802-812, June.
    29. Franciosi, Robert & Kujal, Praveen & Michelitsch, Roland & Smith, Vernon & Deng, Gang, 1996. "Experimental tests of the endowment effect," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 213-226, August.
    30. John W. Payne & Dan J. Laughhunn & Roy Crum, 1980. "Translation of Gambles and Aspiration Level Effects in Risky Choice Behavior," Management Science, INFORMS, vol. 26(10), pages 1039-1060, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. John Hey & Andrea Morone & Ulrich Schmidt, 2009. "Noise and bias in eliciting preferences," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235, December.
    2. Kontek, Krzysztof, 2010. "Density Based Regression for Inhomogeneous Data: Application to Lottery Experiments," MPRA Paper 22268, University Library of Munich, Germany.
    3. Tunçel, Tuba & Hammitt, James K., 2014. "A new meta-analysis on the WTP/WTA disparity," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 175-187.
    4. Kontek, Krzysztof, 2010. "Mean, Median or Mode? A Striking Conclusion From Lottery Experiments," MPRA Paper 21758, University Library of Munich, Germany.
    5. Shosh Shahrabani & Uri Benzion & Tal Shavit, 2008. "WTP and WTA in competitive and non-competitive environments," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3, pages 153-161, February.
    6. Raphaël Giraud, 2012. "Money matters: an axiomatic theory of the endowment effect," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 303-339, June.
    7. Uri Benzion & Shosh Shahrabani & Tal Shavit, 2013. "Retesting The Uncertainty Effect Using Lotteries With Real Products And Money," Bulletin of Economic Research, Wiley Blackwell, vol. 65, pages 175-186, May.
    8. Raphaël Giraud, 2010. "On the interpretation of the WTP/WTA gap as imprecise utility: an axiomatic analysis," Economics Bulletin, AccessEcon, vol. 30(1), pages 692-701.
    9. Chen Li & Zhihua Li & Peter Wakker, 2014. "If nudge cannot be applied: a litmus test of the readers’ stance on paternalism," Theory and Decision, Springer, vol. 76(3), pages 297-315, March.
    10. Trautmann, Stefan T. & Schmidt, Ulrich, 2011. "Pricing risk and ambiguity: The effect of perspective taking," Kiel Working Papers 1727, Kiel Institute for the World Economy (IfW).
    11. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.
    12. Kontek, Krzysztof, 2010. "Estimation of Peaked Densities Over the Interval [0,1] Using Two-Sided Power Distribution: Application to Lottery Experiments," MPRA Paper 22378, University Library of Munich, Germany.
    13. Robert Reilly & Douglas Davis, 2015. "The effects of uncertainty on the WTA–WTP gap," Theory and Decision, Springer, vol. 78(2), pages 261-272, February.
    14. Trautmann, Stefan T. & Traxler, Christian, 2010. "Reserve prices as reference points - Evidence from auctions for football players at Hattrick.org," Journal of Economic Psychology, Elsevier, vol. 31(2), pages 230-240, April.
    15. Kontek, Krzysztof, 2010. "Classifying Behaviors in Risky Choices," MPRA Paper 23845, University Library of Munich, Germany.
    16. Tibor Neugebauer, 2010. "Moral Impossibility in the Petersburg Paradox : A Literature Survey and Experimental Evidence," LSF Research Working Paper Series 10-14, Luxembourg School of Finance, University of Luxembourg.
    17. Heinrich, Timo & Seifert, Matthias & Then, Franziska, 2020. "Near-losses in insurance markets: An experiment," Economics Letters, Elsevier, vol. 186(C).
    18. Shavit Tal & Benzion Uri & Shahrabani Shosh, 2010. "Risk attitude in lotteries offering real products and monetary outcomes," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(2), pages 253-261, June.
    19. Hongli Xu & Hai Yang & Jing Zhou & Yafeng Yin, 2017. "A Route Choice Model with Context-Dependent Value of Time," Transportation Science, INFORMS, vol. 51(2), pages 536-548, May.
    20. Roth, Gerrit, 2006. "Predicting the Gap between Willingness to Accept and Willingness to Pay," Munich Dissertations in Economics 4901, University of Munich, Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sayman, Serdar & Onculer, Ayse, 2005. "Effects of study design characteristics on the WTA-WTP disparity: A meta analytical framework," Journal of Economic Psychology, Elsevier, vol. 26(2), pages 289-312, April.
    2. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
    3. Brown, Thomas C. & Gregory, Robin, 1999. "Why the WTA-WTP disparity matters," Ecological Economics, Elsevier, vol. 28(3), pages 323-335, March.
    4. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
    5. Charles R. Plott & Kathryn Zeiler, 2005. "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review, American Economic Association, vol. 95(3), pages 530-545, June.
    6. Edward J. Lopez & W. Robert Nelson, 2005. "The Endowment Effect in a Public Good Experiment," Experimental 0512001, University Library of Munich, Germany.
    7. 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.
    8. William S. Neilson & Michael McKee & Robert P. Berrens, 2013. "Value and outcome uncertainty as explanations for the WTA vs WTP disparity," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 6, pages 171-189, Edward Elgar Publishing.
    9. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    10. John K. Horowitz & Kenneth E. McConnell & James J. Murphy, 2013. "Behavioral foundations of environmental economics and valuation," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 4, pages 115-156, Edward Elgar Publishing.
    11. Drouvelis, Michalis & Sonnemans, Joep, 2017. "The endowment effect in games," European Economic Review, Elsevier, vol. 94(C), pages 240-262.
    12. Morrison, Gwendolyn C., 2000. "WTP and WTA in repeated trial experiments: Learning or leading?," Journal of Economic Psychology, Elsevier, vol. 21(1), pages 57-72, February.
    13. María del Pilar García Pachón, 2016. "Instrumentos Económicos Y Financieros Para La Gestión Ambiental," Books, Universidad Externado de Colombia, Facultad de Derecho, number 853, January.
    14. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    15. Pavlo Blavatskyy & Ganna Pogrebna, 2010. "Endowment effects? “Even” with half a million on the table!," Theory and Decision, Springer, vol. 68(1), pages 173-192, February.
    16. Thomas A. Rietz, 1991. "Arbitrage," Discussion Papers 958, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    17. Jose Apesteguia & Miguel Ballester, 2009. "A theory of reference-dependent behavior," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 40(3), pages 427-455, September.
    18. Oben K Bayrak & Bengt Kriström, 2016. "Is there a valuation gap? The case of interval valuations," Economics Bulletin, AccessEcon, vol. 36(1), pages 218-236.
    19. Summers, Barbara & Duxbury, Darren, 2012. "Decision-dependent emotions and behavioral anomalies," Organizational Behavior and Human Decision Processes, Elsevier, vol. 118(2), pages 226-238.
    20. Simon Gaechter & Eric Johnson & Andreas Herrmann, 2007. "Individual-Level Loss Aversion In Riskless And Risky Choices," Discussion Papers 2007-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

    More about this item

    Keywords

    WTA-WTP disparity; lotteries; background risk; contingent valuation;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:ifwkie:28786. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: https://edirc.repec.org/data/iwkiede.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.