Information and the Divergence between Willingness to Accept and Willingness to Pay

Abstract There is considerable empirical and experimental evidence that there is a divergence between willingness to accept compensation to give up a good and willingness to pay to obtain a good. This divergence persists even when the good in question is small relative to income, a result in apparent conflict with standard economic theory. This paper develops a theoretical bidding model with costly information acquisition to explain this divergence. The model generates a gap between offers to sell and bids to buy consistent with the experimental results. We argue that the model does a better job of explaining empirical and experimental data than either of the two commonly invoked theoretical explanations: the endowment effect and the substitution effect.

[1]  Mary Jo Kealy,et al.  Contingent Valuation of Environmental Assets: Comparison with a Stimulated Market , 1983 .

[2]  John R. Stoll,et al.  Consumer's Surplus in Commodity Space , 1980 .

[3]  Daniel F. Spulber,et al.  Essays in the Economics of Renewable Resources , 1982 .

[4]  G. Bhattacharya.  The Importance of Learning in Planning with Exhaustible Resources , 1982 .

[5]  Glenn W. Harrison,et al.  Theory and Misbehavior of First-Price Auctions: Reply , 1992 .

[6]  J. Shogren,et al.  5 - Preference Learning and Contingent Valuation Methods* , 1991 .

[7]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[8]  R. McAfee,et al.  Auctions and Bidding , 1986 .

[9]  Charles R. Plott,et al.  Rational Individual Behavior in Markets and Social Choice Processes: the Discovered Preference Hypothesis , 1993 .

[10]  J. van der Straaten,et al.  Environmental Policy and the Economy , 1991 .

[11]  Charles D. Kolstad,et al.  Auction Equilibrium with Costly Information Acquisition , 1997 .

[12]  J. Shogren,et al.  Resolving Differences in Willingness to Pay and Willingness to Accept , 1997 .

[13]  R. Thaler.  Toward a positive theory of consumer choice , 1980 .

[14]  P. Milgrom.  The Structure Of Information In Competitive Bidding , 1978 .

[15]  Michel Demers,et al.  Investment under Uncertainty, Irreversibility and the Arrival of Information Over Time , 1991 .

[16]  Robert D. Willig,et al.  Consumer's Surplus Without Apology , 1976 .

[17]  D. Kahneman,et al.  Experimental Tests of the Endowment Effect and the Coase Theorem , 1990, Journal of Political Economy.

[18]  William D. Schulze,et al.  The Disparity Between Willingness to Accept and Willingness to Pay Measures of Value , 1987 .

[19]  Alan Randall,et al.  A satisfactory benefit cost indicator from contingent valuation , 1987 .