Accurate Valuation in the Absence of Markets

Abstract

Incomplete markets do not provide accurate information about people’s subjective valuations of goods. However, knowledge of these subjective valuations is often important, for example, when compensation payments for damaged or destroyed property are required. We argue that in such cases, an attractive measure of the value of a good is the reservation price of the owner, who is generally the person who values it most highly. If a property is sufficiently unique so that there is no market price that can be used as an approximation, then the only way to learn this subjective reservation price is to have the owner self-assess his property. We describe a mechanism that provides an incentive for the owner to self-assess his property honestly, without requiring that the property’s value be objectively observable