Work

Willingness to Pay, Compensating Variation, and the Cost of Commitment

Year: 2004

Type: article

Abstract: Hicksian welfare theory is static in nature, but many decisions are made in a dynamic environment. We present a dynamic model of an agent's decision to purchase or sell a good under the realistic conditions of uncertainty, irreversibility, and learning over time. Her willingness to pay (WTP) contains both the intrinsic value of the good as in Hicksian theory plus a commitment cost associated with delaying to obtain more information. The Hicksian equivalence between WTP/Willingness to accept (WTA) and compensating and equivalent variations no longer holds. The WTP and WTA divergence may arise and observed WTP values are not always appropriate for welfare analysis.

Source: Economic Inquiry

DOI: 10.1093/ei/cbh077

Authors: Jinhua Zhao, Catherine L. Kling

Institutions: Iowa State University, University of California, Santa Barbara, University of California, Davis, University of California, Berkeley

Language: English

Topic: Economic and Environmental Valuation

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2149706893

FWCI: 7.95

Cites: 54

Cited by: 108

Related to: 10