Buying and Selling Risk -- An Experiment Investigating Evaluation Asymmetries

31 Pages Posted: 5 Feb 2014

See all articles by Werner Guth

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Matteo Ploner

University of Trento

Ivan Soraperra

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Date Written: January 30, 2014

Abstract

Experimental studies of the WTP-WTA gap avoid social trading by implementing an incentive compatible mechanism for each individual trader. We compare a traditional random price mechanism and a novel elicitation mechanism preserving social trading, without sacrificing mutual incentive compatibility. Furthermore, we focus on risky goods -- binary monetary lotteries -- for which asymmetries in evaluations are more robust with respect to experimental procedures. For both elicitation mechanisms, the usual asymmetry in evaluation by sellers and buyers is observed. An econometric estimation sheds new light on its causes: potential buyers are over-pessimistic and systematically underweight the probability of a good outcome.

Keywords: WTP-WTA gap, risk, elicitation mechanisms, probability weighting

JEL Classification: D810

Suggested Citation

Güth, Werner and Ploner, Matteo and Soraperra, Ivan, Buying and Selling Risk -- An Experiment Investigating Evaluation Asymmetries (January 30, 2014). CESifo Working Paper Series No. 4575. Available at SSRN: https://ssrn.com/abstract=2390586

Werner Güth

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Matteo Ploner (Contact Author)

University of Trento ( email )

Via Giuseppe Verdi 26
Trento, Trento 38152
Italy

Ivan Soraperra

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Jena
Germany

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