Willingness to Pay, Compensating Variation, and the Cost of Commitment |
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| Authors: | Jinhua Zhao Catherine L. Kling |
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| Affiliation: | Zhao:;Associate Professor, Department of Economics, Heady Hall, Iowa State University, Ames, IA 50011. Phone 1–515–294–5857, Fax 1–515–294–0221, E-mail Kling:;Professor, Department of Economics, Heady Hall, Iowa State University, Ames, IA 50011. Phone 1–515–294–5767, Fax 1–515–294–0221, E-mail |
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| 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. |
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