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No More Despairing over Disparities: A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity

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  • Catherine Kling
  • John List
  • Jinhua Zhao

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.

Suggested Citation

  • Catherine Kling & John List & Jinhua Zhao, 2013. "No More Despairing over Disparities: A Dynamic Explanation of the Willingness to Pay and Willingness to Accept Disparity," Artefactual Field Experiments 00466, The Field Experiments Website.
    • Handle: RePEc:feb:artefa:00466
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    4. Lee, Ji Yong & Nayga, Rodolfo M. & Deck, Cary & Drichoutis, Andreas, 2017. "Cognitive Ability and Bidding Behavior in Experimental Auction," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258347, Agricultural and Applied Economics Association.
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    6. Gioacchino Pappalardo & Roberta Selvaggi & Salvatore Bracco & Gaetano Chinnici & Biagio Pecorino, 2018. "Factors affecting purchasing process of digestate: evidence from an economic experiment on Sicilian farmers’ willingness to pay," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 6(1), pages 1-12, December.

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