Reference-Dependent Valuations of Risk: Why Willingness-to-Accept Exceeds Willingness-to-Pay
49 Pages Posted: 18 Nov 2011
Date Written: November 8, 2011
The gap between willingness-to-pay (WTP) and willingness-to-accept (WTA) benefit values typifies situations in which reference points — and direction of movement from reference points — are consequential. Why WTA-WTP discrepancies arise is not well understood. We generalize models of reference dependence to identify separate reference dependence effects for increases and decreases in environmental health risk probabilities, for increases and decreases in costs, and reference dependence effects embodying the interaction of two changes. We estimate separate reference dependence effects for the four possible cost and health risk change combinations using data from our choice-based experiment for a nationally representative sample of 4,745 households. The WTA-WTP gap is due largely to the reference dependence effects related to costs. Standard models of reference dependence are not consistent with the results, as there is an interactive effect. Estimated income effects are under a penny and thus cannot account for higher values of WTA relative to WTP.
Keywords: reference dependence, health risks, stated preference, willingness to pay, WTA, WTP
JEL Classification: D80, Q25, I10, H40
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