Willingness to Accept, Willingness to Pay and the Income Effect

By John K. Horowitz, K. Mcconnell. 2003

243 citations recorded by the source corpus.

The disparity between willingness to pay and willingness to accept in experimental and survey settings remains a troubling anomaly. Willingness-to-accept is almost always higher than WTP, often substantially higher. Our interest lies with the neoclassical explanation of Hanemann, who demonstrates that for exogenous quantity changes, the difference between WTP and WTA depends ratio of the ordinary income elasticity of demand for the good to the Allen-Uzawa elasticity of substitution between the good and a composite commodity. When the elasticity of substitution is low, this ratio will be large. The ratio WTA/WTP will then also be large. We use a result of Sugden to formulate the WTA/WTP ratio as a function of the income effect on WTP. We find that the WTA/WTP ratios provided by our comprehensive literature search imply income elasticities and income effects that are implausibly high; much higher than income effects found in the literature; and much higher than income elasticities estimated in the set of studies from which the WTA/WTP results are drawn. Based on the evidence, it is difficult to accept the idea that the observed ratios of WTA/WTP, garnered from a remarkably large and diverse set of studies, are consistent with a standard neoclassical model. Substitution among goods seems an inadequate explanation for the divergence between WTA and WTP.

Subfields: Economics and Econometrics, General Decision Sciences, Marketing

View Paper: https://www.semanticscholar.org/paper/dde26788dcf3000e1b13526dbd8ae1222e6aac10

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Bruno De Borger
2. Jinhuan Zhao
3. Mogens Fosgerau
4. Ying Ge
5. Jie Chang
6. Bin Xu
7. Wu Yang
8. Catherine L. Kling

In General Decision Sciences

1. Mogens Fosgerau
2. Bruno De Borger
3. Catherine L. Kling
4. Jinhuan Zhao
5. Baibing Li

In Marketing

1. Mogens Fosgerau
2. Bruno De Borger
3. Catherine L. Kling
4. Jinhuan Zhao

Citations in the corpus

• The trade-off between money and travel time: A test of the theory of reference-dependent preferences (2008, methodology): “the usefulness of contingent valuation methods as such (e.g., Diamond & Hausman 1994; Horowitz & McConnell 2003 ).”
• A new explanation for the WTP/WTA disparity (2001, background): “Hicksian welfare theory cannot explain this divergence since the implied income effects are implausibly high (Horowitz and McConnell, 2000b).”
• Ecosystem service value assessment for constructed wetlands: A case study in Hangzhou, China (2008, result): “On the other hand, most research results (Hanemann et al., 1991; Sugden, 1999; Horowitz and McConnell, 2003) support the view that incomeaffectsWTP, called the “income effect”.”