Welfare Measures when Agents can Learn: A Unifying Theory

Jinhua Zhao and Catherine Louise Kling ()

Economic Journal, 2009, vol. 119, issue 540, pages 1560-1585

Abstract: We extend Graham's (1981) welfare analysis under uncertainty to a dynamic environment where the agent can delay and obtain information. The dynamic willingness to pay locus unifies the concepts of option price, dynamic WTP, commitment costs and quasi-option value. Option price (dynamic WTP) corresponds to the "ex ante" WTP when the agent ignores (recognises) the learning opportunity. The commitment cost, or the difference between option price and dynamic WTP, equals the annualised and monetised quasi-option value. State contingent contracts have added value by allowing trading among agents with heterogeneous access to future information and delay opportunities. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Date: 2009

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