Theory and Decision

, Volume 66, Issue 3, pp 229–262

An Experimental Investigation of the Disparity Between WTA and WTP for Lotteries

Article

DOI: 10.1007/s11238-007-9062-2

Cite this article as:
Schmidt, U. & Traub, S. Theory Decis (2009) 66: 229. doi:10.1007/s11238-007-9062-2

Abstract

In this paper we experimentally investigate the disparity between willingness-to-accept (WTA) and willingness-to-pay (WTP) for risky lotteries. The direction of the income effect is reversed by endowing subjects with the highest price of a lottery when asking the WTP question. Our results show that the income effect is too small to be the only source of the disparity. Since the disparity concentrates on a subsample of subjects, parametric and nonparametric tests of the WTA-WTP ratio may lead to contradictory results. The disparity is significantly reduced when background risk is introduced. That is, putting subjects always into a risky position could improve the contingent valuation method, which is often concerned with the assessment of risky situations such as health risks, automobile safety, etc.

Keywords

WTA-WTP disparitylotteriesbackground riskcontingent valuation

JEL Classification

C91D81

Copyright information

© Springer Science+Business Media LLC 2007

Authors and Affiliations

  1. 1.Department of Economics, Institut für VolkswirtschaftslehreChristian-Albrechts-Universität zu KielKielGermany
  2. 2.Department of EconomicsUniversity of BremenBremenGermany