Reference Dependence and Incremental WTP

Abstract

Applications using the standard willingness to pay (WTP) approach (where a respondent is asked his/her WTP for each option) have brought to light inherent difficulties in terms of discriminating between various options. Although an incremental WTP approach (where a less preferred option is used as a point of reference to value more preferred options) has been devised to encourage more discrimination, a theoretical basis for this approach has not been elucidated, and results from initial testing of this approach have proved inconclusive. We offer a theoretical basis for this approach, based on the theory of reference dependent preferences. We test our model in a study assessing preferences for emergency care services in France. Our empirical findings are in line with our theoretical framework, showing the standard WTP approach fails to discriminate between alternative options for which there is a strict preference ranking. The incremental approach provides discriminating values and provides a better method for determining preferences in priority-setting and policy contexts.

Keywords: WTP, contingent valuation, reference points, embedding effect, incremental approach, emergency care

JEL Classification: D6, H4, I1