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Willingness to Pay, Compensating Variation, and the Cost of Commitment
Author(s) -
Zhao Jinhua,
Kling Catherine L.
Publication year - 2004
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbh077
Subject(s) - willingness to pay , willingness to accept , economics , equivalence (formal languages) , microeconomics , contingent valuation , welfare , value (mathematics) , divergence (linguistics) , econometrics , mathematics , statistics , market economy , linguistics , philosophy , discrete mathematics
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.