Willingness to Pay versus Willingness to Accept: Why So Different? Many contingent valuation studies have found that res

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Willingness To Pay Versus Willingness To Accept Why So Different Many Contingent Valuation Studies Have Found That Res 1 (290.07 KiB) Viewed 26 times

Willingness to Pay versus Willingness to Accept: Why So Different? Many contingent valuation studies have found that respondents tend to report much higher values for questions that ask what compensation the respondent would be willing to accept (WTA) to give something up than for questions that ask for the willingness to pay (WTP) for an incremental improvement in the same good or service. Economic theory suggests that differences between WTP and WTA should be small, but experimental findings both in environmental economics and in other microeconomic studies have found large differences. Why? Some economists have attributed the discrepancy to a psychological endowment effect; the psychological value of something you own is greater than something you do not. In other words, you would require more compensation to be as well off without it than you would be willing to pay to get that same good, and as such, you would be less willing to give it up (WTA > WTP) (Kahneman, Knetsch, & Thaler, 1990). This is a form of what behavioral economists call loss aversion—the psychological premise that losses are more highly valued than gains. Others have suggested that the difference may be explainable in terms of the market context. In the absence of good substitutes, large differences between WTA and WTP would be the expected outcome. In the presence of 81 Valuing the Environment close substitutes, WTP and WTA should not be that different, but the divergence between the two measures should increase as the degree of substitution decreases (Hanemann, 1991; Shogren et al., 1994). The characteristics of the good may matter as well. In their review of the evidence provided by experimental studies, Horowitz and McConnell (2002) find that for "ordinary goods" the ratio of WTA/WTP is smaller than the ratio of WTA/ WTP for public and nonmarket goods. Their results support the notion that the nature of the property rights involved is not neutral. The moral context of the valuation may matter as well. Croson et al. (Draft 2005) show that the amount of WTA compensation estimated in a damage case increases with the culpability of the party causing the damage as long as that party is also paying the damages. If, however, a third party is paying, WTA is insensitive to culpability. This difference suggests that the valuation implicitly includes an amount levied in punishment for the party who caused the damage (the valuation becomes the lost value plus a sanction). It may also be the case that, in dynamic settings, respondents are uncertain about the value of the good. Zhao and Kling (2004) argue that in intertempo- ral settings, the equivalence of compensating variation/equivalent variation and WTP/ WTA breaks down, in part because WTP and WTA have a behavioral component and the timing of a decision will be impacted by the consumer's rate of time preference and willingness to take risks. A buyer or seller, by com- mitting to a purchase or sale, must forgo opportunities for additional informa- tion. These "commitment costs" reduce WTP and increase WTA. The larger the commitment costs, the larger is the divergence between the two measures. Ultimately, the choice of which concept to use in environmental valuation comes down to how the associated property right is allocated. If someone owns the right to the resource, asking how much compensation they would require to give it up is the appropriate question. If the respondent does not have the right, using WTP to estimate the value of acquiring it is the right approach. However, as Horowitz and McConnell point out, since the holders and nonholders of "rights" value them differently, the initial allocation of property rights can have a strong influence on valuation decisions for environmental amenities. And, as Zhao and Kling note, the timing of the decision can also be an important factor. Sources: Croson, R., Rachlinski, J. J., & Johnston, J. (Draft 2005). Culpability as an explanation of the WTA-WTP discrepancy in contingent valuation; Hanemann, W. M. (1991). Willingness to pay and willingness to accept: How much can they differ? American Economic Review, 81, 635-647; Horowitz, J. K., & McConnell, K. E. (2002). A review of WTA/WTP studies. Journal of Environmental Economics and Management, 44, 426–447; Kahneman, D., Knetsch, J., & Thaler, R. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy, 98, 1325–1348; Shogren, J. F., Shin, Senung Y., Hayes, D. J., & Kliebenstein, J. B. (1994). Resolving differences in willingness to pay and willingness to accept. American Economic Review, 84(1), 255-270; Zhao, Jinhua, & Kling, Catherine. (2004). Willingness to pay, compensating variation and the cost of commitment Economic Inquiry 4213) 503_517