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

Jinhua Zhao and Catherine Kling

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Hicksian welfare theory is static in nature, but many decisions are made in a dynamic environment. We present a dynamic model of an agent's decision to purchase or sell a good under the realistic conditions of uncertainty, irreversibility, and learning over time. Her willingness to pay (WTP) contains both the intrinsic value of the good as in Hicksian theory plus a commitment cost associated with delaying to obtain more information. The Hicksian equivalence between WTP/Willingness to accept (WTA) and compensating and equivalent variations no longer holds. The WTP and WTA divergence may arise and observed WTP values are not always appropriate for welfare analysis.

Date: 2004-07-01
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Published in Economic Inquiry, July 2004, vol. 42 no. 3, pp. 503-517

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Related works:
Journal Article: Willingness to Pay, Compensating Variation, and the Cost of Commitment (2004)
Working Paper: Willingness-to-Pay, Compensating Variation, and the Cost of Commitment (2004)
Working Paper: Willingness-to-Pay, Compensating Variation, and the Cost of Commitment (2000)
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