Theory and Decision

, Volume 78, Issue 2, pp 261–272

The effects of uncertainty on the WTA–WTP gap

Article

DOI: 10.1007/s11238-014-9414-7

Cite this article as:
Reilly, R.J. & Davis, D.D. Theory Decis (2015) 78: 261. doi:10.1007/s11238-014-9414-7

Abstract

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.

Keywords

Compensating variation Equivalent variation  Expected utility theory Willingness to accept Willingness to pay 

JEL Classification

D01 D81 

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Economics, School of BusinessVirginia Commonwealth UniversityRichmondUSA

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