The effects of uncertainty on the WTA–WTP gap
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- Reilly, R.J. & Davis, D.D. Theory Decis (2015) 78: 261. doi:10.1007/s11238-014-9414-7
We analyze the effects of uncertainty on WTA, WTP and the WTA–WTP gap. Extending the approach of Weber (Econom Lett 80:311–315, 2003) to the case of lotteries, we develop an exact expression for the WTA–WTP gap that allows identification of its magnitude under different utility specifications. Reinterpreting and extending results by Gabillon(Econom Lett 116:157–160, 2012), we also identify generally the relationship between an agent’s utility of income and the gap’s algebraic sign, as well as the effects of risk increases on WTA and WTP. Finally, we derive the limit behavior of the gap as income or risk increase.