A dynamic explanation of the willingness to pay and willingness to accept disparity

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

Research output: Contribution to journalArticleResearchpeer-review

13 Citations (Scopus)

Abstract

Recent evidence from laboratory experiments suggests that important disparities exist between willingness to pay (WTP) and compensation demanded for the same good. Because a fundamental postulate in neoclassical theory is that with small income effects and many available substitutes, the willingness to accept (WTA) and WTP measures of value for a commodity should be roughly equivalent, this finding has vast implications in both a positive and normative sense. This study advances, and experimentally tests, a new explanation of the WTP/WTA disparity-a dynamic theory based on the presence of commitment costs. Although to date neoclassical models have not explained the observed data patterns well, 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. Furthermore, we find that market experience attenuates the behavioral anomaly, consistent with the notion that no value disparity exists for agents with sufficient market experience.

Original languageEnglish
Pages (from-to)909-921
Number of pages13
JournalEconomic Inquiry
Volume51
Issue number1
DOIs
Publication statusPublished - Jan 2013
Externally publishedYes

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