A Review of Wta/Wtp Studies

30 Pages Posted: 11 Feb 2001

See all articles by John K. Horowitz

John K. Horowitz

University of Maryland

Kenneth E. McConnell

University of Maryland - Department of Agricultural & Resource Economics

Date Written: October 2000

Abstract

The difference between willingness to pay (WTP) and willingness to accept (WTA) has been widely studied both through theory and experiments. In a typical experiment, a subject is given some item, like a coffee mug, and offered money to return it to the experimenter. The dollar amount the subject asks for is his WTA. Another subject is not given a mug and instead asked to pay for one. The amount he offers is his WTP. Previous authors have shown that WTA is usually substantially larger than WTP and almost all have remarked that the WTA/WTP ratio is much higher than their economic intuition would predict. The pervasiveness of high WTA/WTP ratios and the wide variety of goods that have been used in the experiments have combined to sustain interest in WTA vs. WTP for roughly thirty years.

This paper reviews those studies. We found 45 studies that reported usable data. The studies draw on a remarkable range of goods: chocolates, pens, mugs, movie tickets, hunting licenses, visibility, nuclear waste repositories, nasty-tasting liquids, pathogen-contaminated sandwiches, and many others. To our knowledge, no other economic issue has been experimentally studied across such a wide variety of goods.

We concentrate on two issues. First, it has seemed possible that the high observed ratios are due to "weak" experimental features such as hypothetical payments, student subjects, or elicitation questions that are not incentive compatible. According to this argument, more realistic experiments, such as those with real money or incentive compatible elicitation, will yield lower and more reasonable ratios. We examine the evidence for this claim. Second, we ask: For which goods is a high ratio most likely to be found? With regard to experiment design, we find that ratios in real experiments are not significantly different from hypothetical experiments, and that incentive compatible elicitation yields higher ratios, not lower. In other words, survey techniques that would be expected to yield a "truer" picture of preferences lead either to no change or to higher observed ratios. We also found that students tended to have lower, not higher, ratios than the general public. The evidence on the effects of repetition is mixed; there is not strong evidence that the ratio decreases as subject repeat an experiment. We conclude that high WTA/WTP ratios are not the result of experimental design features that would be considered suspect even apart from their WTA/WTP results.

With regard to patterns in the observed ratios, we find that, on average, the less the good is like an "ordinary market good", the higher is the ratio. The ratio is highest for public and non-market goods, next highest for ordinary private goods, and lowest for experiments involving forms of money. A generalization of this pattern holds even when we account for differences in survey design: Ordinary goods have lower ratios than non-ordinary ones. This pattern is the major result we discover.

Keywords: Willingness-To-Accept, Willingness-To-Pay, Endowment Effect

JEL Classification: D12

Suggested Citation

Horowitz, John K. and McConnell, Kenneth E., A Review of Wta/Wtp Studies (October 2000). Available at SSRN: https://ssrn.com/abstract=257336 or http://dx.doi.org/10.2139/ssrn.257336

John K. Horowitz (Contact Author)

University of Maryland ( email )

Department of Agricultural and Resource Economics 2200 Symons Hall
College Park, MD 20742
United States
301-405-1273 (Phone)
301-314-9091 (Fax)

Kenneth E. McConnell

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States
301-405-1282 (Phone)

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