The willingness to pay–willingness to accept gap: A failed replication of Plott and Zeiler

The well-known willingness to pay–willingness to accept (WTP–WTA) gap refers to the observation that individuals attach a higher value to objects they own (WTA) than to objects they do not own (WTP). We report on experiments to re-investigate the possibility that the WTP–WTA gap arises from subject misconceptions due to experimental procedures as suggested by Plott and Zeiler (2005). The contribution of this paper is two-fold: first, we attempt to replicate the findings by Plott and Zeiler that the WTP–WTA gap disappears when using procedures that are aimed at reducing misconceptions, such as extensive training and practice rounds for the BDM mechanism. However, we fail to do so as the WTP–WTA gap persists in the main task where subjects state their WTA or WTP for a mug. Second, we use the paid practice rounds to identify subjects without apparent misconceptions and find that also for those subjects who never make dominated choices in the lottery tasks, the WTP–WTA gap in the mug task exists. Thus, we find no evidence of the idea that subject misconceptions are the main source of the WTP–WTA gap.     

Modelling the Non-market Environmental Costs and Benefits of Biodiversity Projects Using Contingent Valuation Data

CV studies rarely ask willingness to accept (WTA)questions, yet there are a range of environmentalprojects where there are likely to be potential losersas well as gainers. This paper presents evidence fromsix biodiversity projects that the inclusion ofcontingent compensation payments from thoserespondents who preferred the status quo cansubstantially reduce net project benefits, even whenthe proportion of losers is relatively small. Astatistical model for estimating the mean welfaremeasure from dichotomous choice data which allows forboth positive WTP, zero WTP, and WTA is described. Asmany environmental projects are likely to create bothgainers and losers, we recommend that CV analysts giveserious consideration to the collection and analysisof WTA data otherwise they risk generating biasedestimates of project benefits.     

Auction mechanisms and the measurement of WTP and WTA

We evaluate the impact of three auction mechanisms — the Becker–DeGroot–Marschak mechanism, the second-price auction, and the random nth-price auction — in the measurement of willingness to pay (WTP) and willingness to accept (WTA) measures of value. Our results show that initial bidding in trial 1 in each auction does not contradict the endowment effect; but that, if it is the endowment effect that governs people’s initial bidding behavior, it can be eliminated with repetitions of a second-price or random nth-price auction; and if the thesis is that the effect should persist across auctions and across trials is right, our results suggest that there is no fundamental endowment effect.     

Reference Dependence Effects on WTA and WTP Value Functions and Their Disparity

In this study we investigate two reference dependence effects in a choice experiment. The first is the effect of the well-known distinction between gains and losses, the second is the effect of changing the reference value on willingness to pay (WTP) and willingness to accept (WTA). The latter has to our knowledge not been studied before. We hypothesize that there are differences between WTA and WTP, and that both value functions and their disparity are affected by the absolute value of the reference point. We test our hypotheses using a choice experiment with trade-offs between changes in flood probabilities and costs. The choice experiments elicit WTP and WTA, using two flood probability reference values, yielding four separate value functions. Our findings show that a substantial WTA–WTP disparity exists, and that this disparity increases when moving away from the reference point. Also, both WTA and WTP value functions are affected by the flood probability reference value, and the WTA–WTP disparity increases when the flood probability reference point increases. Both findings suggest that welfare effects caused by changes in public good provision depend not only on the direction of change (loss aversion), but also the reference value. Moreover, our results show that the latter effect is larger for losses than for gains. We introduce the concept of reference point updating as a possible explanation for these findings.     

Endowment effect theory,prediction bias and publicly provided goods: an experimental study

Many studies report on a systematic disparity between the willingness to pay for a certain good (WTP) and the willingness to accept retribution payments in exchange for giving up this good (WTA). Thaler [Thaler RH (1980) J Econ Behav Organ 1:39–60] employs prospect theory to explain this disparity. The literature contains two different interpretations of his endowment effect theory. Accordingly, the disparity is caused either by the disutility from parting with one’s endowment and/or by an extra utility from ownership which is not anticipated by individuals who are not endowed with the good. So far, the empirical evidence on the applicability of endowment effect theory is limited to private goods. This paper reports on an experiment which finds a significant ownership utility effect for a publicly provided good. This result indicates that prospect theory applies to publicly provided goods even though consumers do not have exclusive property rights.      

The Aggregation of Climate Change Damages: a Welfare Theoretic Approach

The economic value of environmental goods is commonly determined using the concepts of willingness to pay (WTP) or willingness to accept (WTA). However, the WTP/WTA observed in different countries (or between individuals) will differ according to socio-economic characteristics, in particular income. This notion of differentiated values for otherwise identical goods (say, a given reduction in mortality risk) has been criticized as unethical, most recently in the context of the 'social cost' chapter of the IPCC Second Assessment Report. These critics argue that, being a function of income, WTP/WTA estimates reflect the unfairness in the current income distribution, and for equity reasons uniform per-unit values should therefore be applied across individuals and countries. This paper analyses the role of equity in the aggregation of climate change damage estimates, using basic tools of welfare economics. It shows one way of how WTP/WTA estimates can be corrected in aggregation if the underlying income distribution is considered unfair. It proposes that in the aggregation process individual estimates be weighted with an equity factor derived from the social welfare and utility functions. Equity weighting can significantly increase aggregate (global) damage figures, although some specifications of weighting functions also imply reduced estimates. The paper also shows that while the postulate of uniform per-unit values is compatible with a wide range of 'reasonable' utility and welfare specifications, there are also cases where the common-value notion is not compatible with defensible welfare concepts.     

Probabilistic dominance and status quo bias

Decision makers have a strong tendency to retain the current state of affairs. This well-documented phenomenon is termed status quo bias. We present the probabilistic dominance approach to status quo bias: an alternative is considered acceptable to replace the status quo only if the chances of a (subjectively) severe loss, relative to the status quo, are not too high. Probabilistic dominance is applied and behaviorally characterized in a choice model that allows for a range of status quo biases, general enough to accommodate unanimity, but also standard expected utility maximization. We present a comparative notion of “revealing more bias towards the status quo” and study its implications to the probabilistic dominance model of choice. Lastly, the model is applied to the endowment effect phenomenon and to a problem of international portfolio choice when investors are home biased.     

The Willingness to Accept Value of Statistical Life Relative to the Willingness to Pay Value: Evidence and Policy Implications

Large disparities between willingness to accept (WTA) and willingness to pay (WTP) based values of statistical life are commonly encountered in empirical studies. Standard economic theory suggests that if a public good is easily substitutable there should be no marked disparity between WTA and WTP values for the good, though the disparity increases with reduced substitutability. However, psychologists have shown that people often treat gains and losses asymmetrically and tend to require a substantially larger increase in wealth to compensate for a loss than the amount they would be willing to pay for an equivalent gain. Although most transport projects may aim to improve safety, situations arise when a relaxation of an existing regulation saves resources but increases the risk of death and injuries. A survey was recently carried out in New Zealand to determine people’s willingness to pay to reduce road risks and their willingness to accept compensation for an increase in risk. This paper reports the disparity observed between the two measures and considers some of the problems posed for policymakers.     

Rational choice with status quo bias

Motivated by the empirical findings concerning the importance of one's current situation on her choice behavior, the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias, and that incorporates the standard choice theory as a special case. We follow a revealed preference approach, and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect, and that are applicable in any choice situation to which the standard (static) choice model applies.     

Cognitive ability and scale bias in the contingent valuation method

This study investigates whether or not the scale bias found in contingent valuation (CVM) studies on mortality risk reductions is a result of cognitive constraints among respondents. Scale bias refers to insensitivity and non-near-proportionality of the respondents’ willingness to pay (WTP) to the size of the risk reduction. Two hundred Swedish students participated in an experiment in which their cognitive ability was tested before they took part in a CVM-study asking them about their WTP to reduce bus-mortality risk. The results imply that WTP answers from respondents with a higher cognitive ability are less flawed by scale bias.     

Keeping up appearances: Motivations for socially desirable responding in contingent valuation interviews

The tendency to give socially desirable rather than true statements of willingness to pay (WTP) is an often reported form of bias in contingent valuation surveys. While previous research on this bias has exclusively focused on the detection of mode effects, the present study directly assesses a respondent's motivation to state WTP in a socially desirable manner. This study tests the effect of three theoretical motivations for socially desirable responding on WTP responses: A general need for social approval, a perceived social norm calling for a high contribution and perceived lack of anonymity of the interview situation. Questions for the empirical assessment of these factors are developed.Results of a valuation study in Southwest China show differing and independent impacts of these factors. While there is no effect of perceived anonymity, need for social approval biases WTP responses upwards but does not influence the general decision to state a positive WTP. It also turns out that rather the fear of losing social status than the striving for higher social approval is the main driver of this bias. Respondents perceiving a social norm for high WTP are more likely to state a positive WTP, but the specific amount is not affected.     

Measuring Stigma: The Behavioral Implications of Disgust

Stigmatization of products and technologies can lead to large monetary losses even when there are no associative risks. This paper reports on experiments that provide insight into the behavioral responses of disgust from an economic perspective. We use a dead sterilized cockroach to ‘contaminate’ drinking water and generate willingness-to-pay (WTP) and willingness-to-accept (WTA) measures of participants’ reactions. These results are contrary to previous results from research not involving financial incentives, as most participants’ WTP and WTA values are near zero for drinking cockroach contaminated water. Additionally, filtration of cockroach water leads participants to become significantly more likely to request compensation compared to spring water, but it does not result in requesting significantly more money to drink it. Finally, WTP and WTA differences can be explained by participants’ decision on whether or not to request compensation and not by the amount of compensation.     

Anchored preference relations

This note explores the implications of a simple and intuitive restriction on reference-dependent preferences assuming the status quo serves as the reference point. The condition imposed potentially rules out situations in which a decision maker has a choice between two prospects, selects one which subsequently becomes the new reference point, and then regrets her initial choice. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non-satiation in which all reference-dependent indifference surfaces are smooth. It is also shown that the condition does admit a class of non-trivial reference-dependent preferences.     

On the theory of reference-dependent preferences

A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahneman’s reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy conventional assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.     

Underperformance of Actively Managed Portfolios: Some Behavioral Insights

Abstract

Two glaring anomalies in investment management are apparent: (1) after fees, active portfolio managers do worse than market indices, and (2) clients continue to pay for services they don’t receive. The purpose of this paper is to offer explanations of these anomalies from a behavioral perspective. We explore some of the cognitive biases that perpetuate active management and subsequent underperformance, including herding, disposition, and endowment effects, as well as conservatism and status quo biases, overconfidence, and agency problems. Investors’ continued use of active managers despite persistent disappointing returns is attributed to being victims of framing effect, hot-hand fallacy, lack of knowledge as well as intimidation or insecurity, and status quo bias. We propose some ways that portfolio managers and investors could improve their decision making.     

Using the travel cost method to value visits and stigma in connection with ARV adherence in Uganda

This article uses the travel cost method to value both client visits to collect antiretroviral therapy (ARV) and stigma, which prevents ARV adherence. Using a representative sample for Uganda initiated specifically for this study, we found a willingness to pay (WTP) valuation for visits made in the range of US$14–US$17 and a willingness to accept (WTA) valuation of US$25 for visits missed. The valuations for stigma based on a novel measure of stigma using a new estimation method were close to the valuations for visits. These valuations can be used to estimate the benefits to carry out cost–benefit analyses (CBAs) of interventions aimed at increasing ARV coverage and adherence.     

Are Internet surveys an alternative to face-to-face interviews in contingent valuation?

Internet is an increasingly popular data collection mode for stated preference research in environmental economics. However, little is known about how this survey mode may influence data quality and welfare estimates. As part of a national contingent valuation (CV) survey estimating willingness to pay (WTP) for biodiversity protection plans, we assign two groups of respondents either to an Internet or face-to-face (in-home) interview mode. Our design aims to better isolate measurement effects from sample composition effects by drawing both samples from the same sample frame. We find little evidence of social desirability bias in the interview setting or satisficing (shortcutting the response process) in the Internet survey. The share of “don't knows”, zeros and protest responses to the WTP question with a payment card is very similar between modes and equality of mean WTP cannot be rejected. Results are fairly encouraging for the use of Internet in CV as stated preferences do not seem to be significantly different or biased compared to face-to-face interviews.     

Public Preferences for Hydrogen Buses: Comparing Interval Data, OLS and Quantile Regression Approaches

We use a quantile regression (QR) approach to analyse contingent valuation estimates of public willingness to pay (WTP) for the air and noise pollution reductions associated with the introduction of hydrogen buses in London. QR results show that variables that were not significant in interval regression or ordinary least squares regression become significant at certain quantiles along the WTP distribution. In addition, the determinants of WTP at the lower tail of the distribution differ from those at the higher end of the distribution. Our findings illustrate the usefulness of quantile regression methods for analysing contingent valuation data, enhancing our understanding of the determinants of willingness to pay.     

A CONTINGENT VALUATION STUDY OF UNCERTAIN ENVIRONMENTAL GAINS

Acid deposition in a present and future cause of biodiversity losses in vulnerable upland areas of Scotland important for nature conservation. However, the exact nature of damages under the status quo, and both the timing and extent of recovery of upland ecosystems if deposition is reduced, are subject to uncertainty. this uncertainty complicates damages cost estimation. In this paper, we have explored the use of CVM to measure the willingness to pay (WTP) of the Scottish population for uncertain recovery/damage scenarios from reduced acid rain deposition. An optimally-designed referendum format was used utilising the distribution of open-ended bids from a pilot study to determine bid amounts and sampling size for each bid amount. Eight explanatory variables, including future damage level were selected in a non-linear step-wise regression analysis. Average household WTP for abatement of acid rain was £247 and £351 per year when faced with low and high future damage levels respectively. Recovery level and recovery time did not significantly influence WTP. When faced with risky outcomes regarding future damage and recovery level, respondent were found to be risk averse to both environmental gains and losses.