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

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.     

TAXPAYER WILLINGNESS TO PAY FOR HEALTH INSURANCE REFORM: A CONTINGENT VALUATION ANALYSIS

A key criterion for evaluating policies to expand health insurance coverage is weighing the costs of such policies against the willingness of the public to pay for coverage expansions. We use new panel survey data from New York State to estimate residents' willingness to pay (WTP) to expand public insurance coverage. Using a nonparametric double‐bounded contingent valuation (CV) approach, we specifically ask residents about their WTP to reduce the rate of uninsurance in the state. Our results imply an aggregate lower‐bound WTP of over $2,800 per year to cover one person. We also analyze heterogeneity in WTP by sub‐group and changes in individual WTP over time between 2008 and 2010. We find that a large majority of residents are willing to pay additional taxes to reduce the number of uninsured in the state, and that average WTP remained remarkably stable despite the economic downturn and the politically polarized discussions surrounding the Affordable Care Act. Decomposing the changes in individual WTP, we find that economic factors related to the recession, including changes in income and employment status, cannot explain changes in individual WTP, whereas individual changes in political opinions about health insurance reform between 2008 and 2010 are strongly correlated with changes in WTP. (JEL H20, H42, H51, H75, I13)     

Understanding the WTA–WTP gap: Attitudes, feelings, uncertainty and personality

We present an experiment designed to study the psychological basis for the willingness to accept (WTA)–willingness to pay (WTP) gap. Specifically, we conduct a standard WTA–WTP economic experiment to replicate the gap and include in it five additional instruments to try to follow the psychological processes producing it. These instruments are designed to measure five psychological constructs we consider especially relevant: (1) attitudes, (2) feelings, (3) familiarity with the target good, (4) risk attitudes, and (5) personality. Our results provide important new insights into the psychological foundations of the WTA–WTP disparity, which can be used to organize some major previous results and cast serious doubts on the claim that the gap might be just a consequence of inappropriate experimental practice.     

Commitment and weakness of will in game theory and neoclassical economics

This paper draws on theoretical and experimental studies in game theory and on the neoclassical concept of intertemporal inconsistency in choice to argue that the motivational theory shared by neoclassical economics and noncooperative game theory is mistaken in assuming that commitment never takes place in human decisions. The paper first gives two parallel examples, one of intertemporal inconsistency in a financial decision, and the other of noncooperative (subgame perfect) equilibrium in a game in extensive form. So far as one decision-maker is concerned, the two decisions are isomorphic, and both can be associated with weakness of will. By contrast, the cooperative analysis of the game (along the lines originally suggested by von Neumann and Morgenstern) predicts a different decision associated with commitment to a particular conditional sequence of “behavior strategies”, i.e. a particular pure strategy. In effect the cooperative analysis assumes perfect strength of will. The paper then argues that strength of will and rationality of decisions are independent dimensions of a decision process and reviews some experimental evidence that suggests that both traditions are mistaken in their extreme assumptions about commitment or strength of will: neoclassical economics and noncooperative game theory in assuming that commitment never takes place, and cooperative game theory in assuming that it always does. The evidence indicates moreover that commitment is more likely in at least one context of value judgments than in its absence. The value context is reciprocity. It is suggested that a focus of research on the circumstances that favor commitment – rather than on modifications of an assumed utility function to accommodate non-self-regarding motivations – might lead to a more fruitful behavioral economics and behavioral game theory.     

WILLINGNESS TOUPEE

In this paper we tackle the hairy problem of male pattern baldness. We survey balding men and elicit their willingness to pay to move from their current situation to a more plentiful one. Then we comb‐over the results. What's the average willingness to pay to move from a glistening cue ball to a luscious mane? About $30,000. (JEL B12)     

FACTORS AFFECTING WILLINGNESS OF SOCIAL WORK STUDENTS TO ACCEPT JOBS IN AGING

The aging of the United States population is creating an increased need for social workers and other helping professionals with training in gerontology. Recent estimates indicate that less than 3% of MSW students are enrolled in an aging concentration, as compared to 19.0% enrolled in children/youth concentrations. This study (N=126) examines factors that affect the willingness of social work students to accept jobs in aging. Results of a hierarchical logistic regression indicate that age and personal/professional experiences with older people (but not gender, race, or educational level) significantly predicted willingness to accept jobs in aging.     

RELIABILITY OF STATED PREFERENCES FOR CHOLERA AND TYPHOID VACCINES WITH TIME TO THINK IN HUE,VIETNAM

We examine the effect of giving respondents time to think about their stated choices (SC) in a survey of cholera and typhoid vaccine preferences in Hue, Vietnam. Because neither vaccine is widely available in Vietnam, we used the SC approach (a stated preference technique) and gave half of our respondents overnight to think about their choices to make the hypothetical valuation scenario as similar to a real‐life choice situation as possible. Respondents who were given extra time made fewer choices that violated internal validity tests of utility theory, and had lower average willingness to pay (WTP), confirming a result found in similar studies in the contingent valuation literature. (JEL D12, I18, C25)     

PRODUCER AND CONSUMER RESPONSES TO GREEN HOUSING LABELS

We find “green” labels increase residential property values by an average of 5%. This premium varies by label stringency and across market segments. Builders respond to the stringency of labels by strategically incorporating green features to achieve higher ratings. This strategy seems reasonable as there is no market premium for green features that lead to scores between label rating cutoff values. These results raise important questions as to how green label policies should be designed in order to foster the supply of green features. Gradations of green attributes are influential, particularly for highly rated homes. The most stringent labels have the greatest role at the high price end of the market. (JEL Q20, Q40, R31)     

Can willingness to pay capture the value of altruism? An exploration of Sen’s notion of commitment

Amartya Sen’s distinction between sympathy and commitment is used to examine the assertion that willingness to pay (WTP) can capture the value of altruism in health care. Willingness to pay values for a vaccination program stated to benefit only one’s self in the first instance and only other people in the second instance were elicited from a small convenience sample. Qualitative methods were then used to explore the meaning of the responses. Commitment was found to be a motivating factor and drove a wedge between willingness to pay and valuation of the program. The consequences of this for health economic research are discussed.     

ELECTRIC AND PLUG‐IN HYBRID VEHICLE DEMAND: LESSONS FOR AN EMERGING MARKET

Understanding demand in the new plug‐in hybrid electric vehicle (PHEV) market is critical to designing more effective adoption policies. We use stated preference data from an innovative choice experiment to estimate demand for PHEVs relative to battery electric vehicles (BEVs) and to explore heterogeneity in demand for these vehicles. We find the gap between willingness to pay for PHEVs and their price premium over conventional vehicles is on the order of current subsidies, while that of BEVs is an order of magnitude larger. We use a latent class model to show PHEVs draw a different consumer segment into the market. (JEL Q5, R41)     

SEX AND WILLINGNESS TO MOVE FOR OCCUPATIONAL ADVANCEMENT: SOME NATIONAL SAMPLE RESULTS

The comparative willingness of men and women to be geographically mobile for occupational advancement and the contributions of various factors to this relationship are explored using national survey-data. Variables identified by past theory and research as mediating the association between sex and willingness to move did explain a substantial amount of variance in willingness to relocate in the entire sample and subsamples of married respondents and respondents in dual-earner couples. However, in each case, sex continued to explain significant additional variance in willingness to move Reasons for this finding and implications for further research are explored.     

The effects of direct experience on consumer product evaluation

The effects of different sales strategies on consumer product evaluation were investigated. It was expected that direct product experience could decrease economic product valuation. Experiments 1 and 2 studied the effects of product trials and money-back guarantees on consumer willingness to pay (WTP). It appeared that WTP was significantly lower after a product trial than with a money-back guarantee or normal sale. In Experiment 3 a structural equation model showed that product trials had a positive effect on attitude toward the product. Also, a negative effect on WTP was found when the effect was measured directly, but a positive effect when the effect was measured indirectly (through attitude).     

BILATERAL OLIGOPOLY IN POLLUTION PERMIT MARKETS: EXPERIMENTAL EVIDENCE

We experimentally investigate behavior in a bilateral oligopoly using a supply function equilibria model discussed by Klemperer and Meyer (1989), Hendricks and McAfee (2010), and Malueg and Yates (2009). We focus on the role that market size and the degree of firm heterogeneity have on the market equilibrium. Our results indicate that subjects within the experiment recognize the strategic incentives in a bilateral oligopoly, but they do not exploit these incentives to the exact magnitude predicted by theory. We find weaker support for predicted market outcomes, as market efficiency does not depend on market size, and in some cases buyers or sellers are more successful at extracting the rents from the market. (JEL L13, Q5, C9)     

Labor Market Structure and Career Occupational Status Mobility: A Theoretical Model*

Sociological explanations of career or intragenerational occupational status mobility generally have not taken into explicit account the effects of labor market structure. Rooted in structural-functionalist sociological theory or neoclassical economic theories of the labor market, models typically misrepresent the process of individual occupational status mobility, primarily by including only individual characteristics. Dual labor market theory is introduced, direct as well as indirect effects of labor market structure on career occupational status mobility are outlined, and a theoretical model is presented. It is hypothesized that labor market structure will have direct effects on opportunities for career occupational status mobility that are independent of the effects of individual characteristics. Additional indirect effects are suggested: through their effects on social network structures, labor markets operate as job opportunity information filters.     

SALIENCE AND THE GOVERNMENT PROVISION OF PUBLIC GOODS

This paper examines how behavioral biases caused by salient events affect the government provision of public goods. We develop a theory in which competing communities lobby the government for allocations of a local public good. Salient events bias community demands for the good, which results in inefficient allocations. We empirically test this theory using salient wildfires and government projects to reduce wildfire risk. Wildfires reduce risk to nearby communities, but may increase demand for fuels management projects because of biases induced by salient wildfires. We find that communities experiencing recent nearby fires are more likely to receive fuels management projects. (JEL D03, H41, Q24)     

An investigation of the endowment effect in the context of a college housing lottery

The endowment effect was examined in a two-part study in the context of a college housing lottery. Students who were awarded their first choice of residence hall were asked the lowest dollar amount they would be willing to accept (WTA) to give up their first choice hall whereas students who were denied their first choice were asked the highest dollar amount they would be willing to pay (WTP) to obtain their first choice. Results from the initial assessment showed the presence of the endowment effect regarding students’ valuation of their first choice residence hall immediately after the housing lottery (i.e., WTA price was significantly higher than WTP price). The follow-up surveyed participants from the initial assessment who responded when contacted a second time after they had experienced two months of life in the residence hall they were awarded in the lottery. Results from the follow-up showed that the endowment effect was still present after experiencing life in the residence hall. Moreover, further analyses revealed that the endowment effect was, in fact, enhanced after the living experience. These findings demonstrate that within the context of a housing lottery, a highly-valued commodity, long-term experiences substantially increase the magnitude of the endowment effect, even when controlling for other factors that have been shown to impact this effect.     

A feminist critique of rational-choice theories: Implications for sociology

I consider the relationship between two currents affecting sociology, rational-choice theory and interdisciplinary feminist theory. In particular, I consider how the feminist critique of the separative model of self applies to one version of rational-choice theory, neoclassical economics. In discussing this I identify four assumptions of neoclassical economics: selfishness; interpersonal utility comparisons are impossible; tastes are exogenous and unchanging; and individuals are rational. I argue that each of these harmonizes best with a view of separate rather than connected selves, and that this imbalance distorts theories, particularly those that claim to understand women’s experience. These distorting assumptions are less prevalent in sociology than in economics, but some of them are implicit in some versions of sociological rational-choice and exchange theories. I conclude by using research on marital power to illustrate how removing distorting assumptions and bringing questions about separation/connection to center stage can help illuminate sociological research. Her forthcoming book,Comparable Worth: Theories and Evidence (New York: Aldine deGruyter), discusses this controversial policy issue from a perspective that draws upon sociology, economics, and feminist theory.     

ON THE PREFERENCES OF PRINCIPALS AND AGENTS

One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgment and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast‐growing, small‐manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences is an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods (JEL C93, D81, D86).     

SELLING TO BIASED BELIEVERS: STRATEGIES OF ONLINE LOTTERY TICKET VENDORS

We provide evidence that sellers respond to buyers' belief biases in a collective lottery betting market, by adopting sales strategies which cater to believers in the Hot Hand and Gambler's Fallacies. Lottery players on the buyer side tend to avoid buying tickets which are similar to the previous winning ticket, in accordance with the Gambler's Fallacy (Clotfelter and Cook 1993; Terrell 1994). At the same time, buyers tend to prefer purchasing tickets from previously winning sellers, despite the fully random nature of wins, in accordance with Hot‐Hand Fallacy (Croson and Sundali 2005). These behavioral biases provide an opportunity for ticket sellers to increase their expected profits by adjusting features of the lottery portfolios they sell. We find that sellers make changes to their portfolio size, commission rate, self‐purchase rate, and number choices in response to previous events, in ways that are consistent with responding to the Hot‐Hand Fallacy belief, and which also lend a degree of support for responding to the Gambler's Fallacy belief. Our results show evidence of participants in a market accommodating their choices to the biased beliefs of other participants in order to gain an advantage in expected profits. (JEL D01, D03, D81, L86)     

Perceived Job Insecurity of White and Black Workers: An Expanded Gap in Organizations with Layoff Prevention Commitment

This study investigates the racial disparity in perceived job insecurity between black and white workers in the context of employers’ layoff prevention commitment. Using a unique employer-employee dataset combining the General Social Survey (2002) and the National Organization Survey (2002), we find that human capital indicators, job characteristics, and previous job loss are not sufficient to account for the high job insecurity perceived by black workers. Rather, an organizational commitment to avoid layoffs is a significant factor conditioning the racial disparity in perceived job insecurity. While the presence of an organizational commitment to prevent layoffs expands the racial disparity in perceived job insecurity, the absence of such a commitment to prevent layoffs attenuates such disparity.