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

Jinhua Zhao · Catherine Louise Kling

108 citations0/0 files storedEconomic Inquiry

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Economic and Environmental Valuation Decision-Making and Behavioral Economics Experimental Behavioral Economics Studies

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.

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References

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