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

Jinhua Zhao and Catherine Kling

Economic Inquiry, 2004, vol. 42, issue 3, 503-517

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. (JEL D60, D83) Copyright 2004, Oxford University Press.

JEL-codes: D60 D83 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (42)

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