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The effects of uncertainty on the WTA–WTP gap

Robert Reilly and Douglas Davis

Theory and Decision, 2015, vol. 78, issue 2, 272 pages

Abstract: We analyze the effects of uncertainty on WTA, WTP and the WTA–WTP gap. Extending the approach of Weber (Econom Lett 80:311–315, 2003 ) to the case of lotteries, we develop an exact expression for the WTA–WTP gap that allows identification of its magnitude under different utility specifications. Reinterpreting and extending results by Gabillon(Econom Lett 116:157–160, 2012 ), we also identify generally the relationship between an agent’s utility of income and the gap’s algebraic sign, as well as the effects of risk increases on WTA and WTP. Finally, we derive the limit behavior of the gap as income or risk increase. Copyright Springer Science+Business Media New York 2015

Keywords: Compensating variation; Equivalent variation; Expected utility theory; Willingness to accept; Willingness to pay; D01; D81 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11238-014-9414-7

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