The Willingness to Pay–Willingness to Accept Gap, the “Endowment Effect,” Subject Misconceptions, and Experimental Procedures for Eliciting Valuations

Abstract

We conduct experiments to explore the possibility that subject misconceptions, as opposed to a particular theory of preferences referred to as the “endowment effect,” account for reported gaps between willingness to pay (“WTP”) and willingness to accept (“WTA”). The literature reveals two important facts. First, there is no consensus regarding the nature or robustness of WTP-WTA gaps. Second, while experimenters are careful to control for subject misconceptions, there is no consensus about the fundamental properties of misconceptions or how to avoid them. Instead, by implementing different types of experimental controls, experimenters have revealed notions of how misconceptions arise. Experimenters have applied these controls separately or in different combinations. Such controls include ensuring subject anonymity, using incentive-compatible elicitation mechanisms, and providing subjects with practice and training on the elicitation mechanism before employing it to measure valuations. The pattern of results reported in the literature suggests that the widely differing reports of WTP-WTA gaps could be due to an incomplete science regarding subject misconceptions. We implement a “revealed theory” methodology to compensate for the lack of a theory of misconceptions. Theories implicit in experimental procedures found in the literature are at the heart of our experimental design. Thus, our approach to addressing subject misconceptions reflects an attempt to control simultaneously for all dimensions of concern over possible subject misconceptions found in the literature. To this end, our procedures modify the Becker-DeGroot-Marschak mechanism used in previous studies to elicit values. In addition, our procedures supplement commonly used procedures by providing extensive training on the elicitation mechanism before subjects provide WTP and WTA responses. Experiments were conducted using both lotteries and mugs, goods frequently used in endowment effect experiments. Using the modified procedures, we observe no gap between WTA and WTP. Therefore, our results call into question the interpretation of observed gaps as evidence of loss aversion or prospect theory. Further evidence is required before convincing interpretations of observed gaps can be advanced.

Willingness to Accept Equals Willingness to Pay for Labor Market Estimates of the Value of Statistical Life

“…Continuing with the link to the experimental literature, our results also can be interpreted as consistent with the findings of Plott and Zeiler (2005), who ran experiments with lotteries and mugs and found no divergence between WTA and WTP. They have several conjectures for their findings that apply to our situation.…”

Elicitation formats and the WTA/WTP gap: A study of climate neutral foods

“…Our result that a payment card format can mute the WTA/WTP gap echoes the con- Plott and Zeiler (2005) that observed gaps do not reflect a fundamental feature of human preferences given that the gap was not observed across all our experimental treatments. However, we do not have a definite answer as per what accounts for the gap across the different payment formats.…”

Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis

“…Although this effect seems highly replicable in well-defined settings, there is some evidence that it may not be robust if decisions are repeated (see Plott and Zeiler 2005). The work of List (2003) reveals parallel findings in naturally occurring market settings: in the markets that he investigates, traders are, in the aggregate, prone to an endowment effect but the size of the effect across traders depends on their individual level of market experience.…”