Researching Preferences, Valuation and Hypothetical Bias
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A number of recent papers in environmental economics have focused on the process of researching preferences – agents are uncertain about preferences but with effort may narrow their uncertainty. This issue has arisen in formulating bids in contingent valuation (CV) as well as the debate over the divergence between WTP and WTA. In the context of CV, it has been suggested that the hypothetical nature of the preference elicitation process biases responses. This paper provides both a theoretical model and experimental evidence to contribute to this debate. The model is a model of competitive bidding for a private good with two components that are particularly relevant to the debate. The first component is that bidders are unsure of their own value for the private good but may purchase information about their own value (researching preferences). The second component is that there is a probability that the auction is hypothetical – that the winning bidder will not get the private good and will not pay the winning bid. The experiment tests this theoretical model of bidding equilibrium and analyzes the effects of variations in the parameters (hypotheticalness, information costs and number of agents) on the endogenous variables (such as the proportion of bidders who become informed and the winning bid). Experimental results suggest that an increase in the hypotheticalness of an auction tends to decrease the likelihood that bidders pay for information on their valuation with an ambiguous effect on the winning bid.
Keywordsbidding contingent valuation hypothetical bias information acquisition private values auction researching preferences uncertainty valuation value discovery
JEL categoriesC900 D440 D800 Q500 Q510
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Research supported in part by grants from the Research Board of the University of Illinois, the Academic Senate of the University of California, and NSF Grant SBR-9496303. The authors gratefully acknowledge the provision of an experimental economics laboratory and computer support services by the Commerce Research Office of the University of Illinois at Urbana-Champaign. We also appreciate helpful suggestions from John Braden and Anne Villamil. However, none of them bears responsibilities for shortcomings. We also wish to thank two anonymous referees for very helpful suggestions. We would also like to express our appreciation to John List for encouraging us to persevere with this paper.
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