A DYNAMIC EXPLANATION OF THE WILLINGNESS TO PAY AND WILLINGNESS TO ACCEPT DISPARITY

Authors

  • CATHERINE L. KLING,

    1. Kling: Professor, Department of Economics, Iowa State University, 568D Heady Hall, Ames, IA 50011-1070. Phone 515-294-5767, Fax 515-294-0221, E-mail ckling@iastate.edu
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  • JOHN A. LIST,

    1. List: Homer J. Livingston Professor of Economics, University of Chicago, NBER Research Associate, Booth School of Business, 5807 S Woodlawn Ave Chicago IL, 60637. Phone 773 702 6576, Fax 773 834 3040, E-mail jlist@uchicago.edu
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  • JINHUA ZHAO

    1. Zhao: Professor, Department of Economics, Department of Agriculture, Food and Resource Economics, Director, Environmental Science and Policy Program, Michigan State University, East Lansing, MI 48824. Phone 517-355-7755, Fax 517-432-1068, E-mail jzhao@msu.edu
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    • Dan Ariely, Glenn Harrison, Danny Kahneman, Liesl Koch, and Bob Sugden provided useful remarks on an earlier version of this study. Thanks to seminar participants at several universities and conferences, to two anonymous referees, and a co-editor for providing useful comments. Any errors remain our own.


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. (JEL Q21, Q26)

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