Willingness-to-Pay, Compensating Variation, and the Cost of Commitment

Jinhua Zhao and Catherine L. Kling

No 18357, Hebrew University of Jerusalem Archive from Hebrew University of Jerusalem

Abstract: We present a dynamic model of an agent's decision to purchase or sell a good under conditions of uncertainty, irreversibility, and learning over time. Her WTP contains both the intrinsic value of the good and a commitment cost associated with delaying the decision until more information is available. Consequently, the standard Hicksian equivalence between WTP/WTA and compensating and equivalent variation no longer holds. This finding has important practical implications as it implies that observed WTP values are not always appropriate for welfare analysis.

Keywords: Demand; and; Price; Analysis (search for similar items in EconPapers)
Pages: 33
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:ags:hebarc:18357

DOI: 10.22004/ag.econ.18357

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