Predicting the gap between willingness to accept and willingness to pay [Elektronische Ressource] / Gerrit Roth

Gerrit Roth

Informations

• Publié par: ludwig-maximilians-universitat_munchen
• Publié le: 01 janvier 2006
• Nombre de lectures: 10
• Langue: English
• Poids de l'ouvrage: 1 Mo

Extrait

Predicting the Gap between
Willingness to Accept and
Willingness to Pay


Inaugural-Dissertation
zur Erlangung des Grades Doctor oeconomicae publicae (Dr. oec. publ.)
an der Ludwig-Maximilians-Universität München
Munich Graduate School of Economics
Volkswirtschaftliche Fakultät

2005




vorgelegt von
Gerrit Roth


Referent: Prof. Ray Rees
Korreferent: Prof. Dr. Joachim Winter
Promotionsabschlussberatung: 8.2.2006

Abstract:
People report much larger willingness to accept (WTA) than willingness to pay (WTP)
under a broad range of circumstances. This dissertation tries to answer the question
when people will report this gap, how large the difference between the two answers will
be and what reasons lie behind this behavior:
We find that uncertainty about the desire to trade a good lies at the heart of the gap
measured in experiments. A formal model extending Prospect Theory by “aversion to
risk changes” predicts that the endowment effect increases with uncertainty. Data from
our own behavioral experiment confirms the uncertainty hypothesis.
When applied to a different phenomenon, so-called “Preference Reversal”, the model
can predict when different types of the observed reversals occur, closing an explanatory
gap that other theories have left open.
In surveys about valuing public goods, a much larger gap between WTA and WTP is
found than in experiments with real transactions. Our own survey confirms that the rea-
son for this lies in participants not taking the WTA situation serious and answering like
in an opinion poll.




Overview:
The General Introduction gives an overview over the experimental evidence and the
theories that have been proposed as explanations.
Chapter 1 introduces our own formal hypothesis for the experimental endowment ef-
fect. Competing hypotheses are tested in an own behavioral experiment.
Chapter 2 shows how the endowment effect model can help to explain another anom-
aly, the so-called “preference reversal” phenomenon.
Chapter 3 discusses why the gap between WTA and WTP in the valuation of public
goods with the so-called “contingent valuation” method is so much larger than in ex-
periments. A hypothesis is tested with data from our own survey.

2

To Jörn

To Katya


Acknowledgements
I thank Ray Rees for the fairness of his judgements and Joachim Winter for all the
support that he gave me at the critical moment when I planned my experiment and the
survey.
I thank Serge Blondel and Louis Lévy-Garboua for giving me access to their unique
data. I thank Kathy Zeiler for providing me with her newest research, Charlotte Phelps
for a lot of encouragement and Lorne Carmichael for interesting discussions.
I thank my colleagues Christian Traxler, Stefan Bornemann, Andreas Leukert (espe-
cially for telling me about the “outreg” command in Stata, without which analysing 186
individual regressions for chapter 2 would have been impossible), Ludek Kolecek, Ro-
main Baeriswyl, Uwe Böwer, Ingo Kohlschein, Michela Coppola and Hanjo Köhler for
helpful comments.
I am also indebted to the people that keep the Munich Graduate School of Economics
and University of Munich going: Ingeborg Buchmayr, Ekaterini Tzika ( Λικατερί ν η
Τζήκα, if I get it right), Dirk Rösing and Peter Dumitsch.
I thank my father for all the inspiring discussions.
Last but not least I thank Ekaterina Avershina for being there. Я люблю те бя!

3
Table of Contents
General Introduction............................................................................................................................8
I. Experiments...............................................................................................................................9
II. Theories...................................................................................................................................12
Prospect Theory ..........................................................................................................................12
Regret Theory..............................................................................................................................19
Theories linking the Endowment Effect and Uncertainty ...........................................................19
Other Endowment Effect Theories..............................................................................................22
Appendix of the Genral Introduction ...............................................................................................25
Additional Tables and Figures ....................................................................................................25
List of Endowment Effect Experiments 1983 – 2005........................................................................26
Chapter 1: Uncertainty and the Experimental Endowment Effect ..............................................27
Introduction......................................................................................................................................28
I. Uncertainty about Desire to trade...........................................................................................28
II. A simple Model of Aversion to Risk Changes..........................................................................31
Formulation of the Model ...........................................................................................................33
III. Experiment..........................................................................................................................37
Method .......................................................................................................................................37
Results.........................................................................................................................................40
IV. Discussion...........................................................................................................................59
Relation to other empirical Evidence ..........................................................................................59
Relevance for Policy Issues.........................................................................................................62
Conclusion..................65
Appendix ..........................................................................................................................................66
I. Application of the Results to Experimental Data ...............................................................66
II. Additional Tables & Figures ..............................................................................................67
III. Own Experiment – Setup and Instructions ....................................................................73
Chapter 2: Can we predict Preference Reversal?..........................................................................97
Introduction......................................................................................................................................98
I. Expected Utility: Choice vs. Pricing .......................................................................................99
II. Empirical Evidence ...............................................................................................................101
Preference Reversal in the Selling Treatment ...........................................................................101
4
Prominent Explanations of Preference Reversal .......................................................................104
Preference Reversal in the Buying Treatment...........................................................................105
Endowment Effect Theories and Preference Reversal ..............................................................107
III. Test & Calibration of own Model.....................................................................................110
Model Formulation....................................................................................................................110
Data ...........................................................................................................................................111
Model Testing / Estimation of Parameters ................................................................................115
Predicting preference reversal...................................................................................................128
Conclusion .....................................................................................................................................132
Appendix ........................................................................................................................................133
Additional Figures and Tables ..................................................................................................133
Chapter 3: The WTA-WTP-gap in Contingent Valuation Studies ............................................136
Introduction....................................................................................................................................137
I. His