An Experimental Investigation of the Disparity Between WTA and WTP for Lotteries

Abstract

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Pricing Risk and Ambiguity: The Effect of Perspective Taking

“…Empirically, however, a valuation difference is commonly observed (see e.g. Birnbaum, Coffey, Mellers & Weiss, 1992;Knetsch & Sinden 1994), even Pricing risk and ambiguity 3 if wealth effects are precluded (Schmidt & Traub, 2009). The seller perspective systematically leads to higher valuations than the buyer perspective.…”

Bridging the WTA-WTP Gap: Ownership, Bargaining, and the Endowment Effect

“…Additionally, several recent experiments have failed to produce a WTA/WTA gap in numerous different experimental scenarios, contrary to the predictions of the 4 theory of loss aversion (Singh 1991, Ortona & Scacciati 1992, Shogren et al 1994, Van Dijk & Van Knippenberg 1996, Morrison 1997, Schmidt & Traub 2003, Lerner et al 2004, Blondel & Lévy-Garboua 2005, Van de Ven et al 2005, Plott & Zeiler 2005, Roth 2006). …”

Testing the Endowment Effect for Default Rules

“…For instance, once the subjects are endowed with contract A and another time with contract B. The next-to-last column Since there is an ongoing discussion in the literature whether offering both less risk and more payoffs systematically influences the size of the endowment effect (Schmidt and Traub, 2009), we also test contract pairs with no differences in expected payoffs. Therefore, we can interpret the W T P of contract pairs 2, 6, and 7 (of course, also W T A in variation) as certainty equivalents and will thus be a measure for risk aversion.…”

“…However, for experimental purposes an approximation through constant absolute risk aversion is often made because differences in wealth are small and the expected change in risk aversion is negligible. In addition, there is experimental evidence that the WTA-WTP gap still remains significant even if a reversed income effect is present (e.g., Schmidt and Traub, 2009). according to game-theoretical predictions, the subjects' WTP for the alternative liability rule should be equal to their WTA.…”

“…Standardized W T A/W T P disparities are calculated as ratios following Harless (1989), Plott and Zeiler (2005), Traub (2009), andIsoni et al (2011). The results of the Wilcoxon signed-rank test are reported below the W T A and W T P valuations.…”