Value and Outcome Uncertainty as Explanations for the WTA vs WTP Disparity: Theory and Experimental Evidence

Abstract

This paper contributes to the widespread discussion of the sources of the divergence between WTA and WTP values. The paper reports on theoretical and empirical investigations which show that value and outcome uncertainty offer an explanation for this disparity. Given a set of hypotheses generated by the theory, the paper investigates the disparity using an inducedvalue experimental laboratory setting. The incentive-compatible Becker-DeGroot-Marshak mechanism is employed to elicit the WTP and WTA values. Two conclusions can be drawn from the empirical results. First, the WTA - WTP difference is generally increasing in both value and outcome uncertainty. Second, a re-contracting option reduces the disparity when it arises from value uncertainty. Key Words: Experimental, Uncertainty, WTP-WTA disparity