Probability Pricing

Eduardo D‡vila, Cecilia Parlatore and Ansgar Walther
Additional contact information
Eduardo D‡vila: Yale University
Cecilia Parlatore: NYU
Ansgar Walther: ICL

No 2473, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper develops probability pricing, extending cash flow pricing to quantify the willingness to pay for changes in probabilities. We show that the value of any marginal change in probabilities can be expressed as a standard asset-pricing formula with hypothetical cash flows derived from changes in the survival function. This equivalence between probability and cash flow valuation allows us to construct hedging strategies and systematically decompose individual and aggregate willingness-to-pay. Four applications examine the valuation of changes in the distribution of aggregate consumption, the efficiency effects of varying performance precision in principal-agent problems, and the welfare implications of public and private information.

Pages: 72 pages
Date: 2025-11-17
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