Abstract

Damages or a loss in economic well-being can be measured by either the maximum sum people would pay to avoid the loss, or by the minimum compensation they would require to accept it. These alternative bases for evaluation have been assumed to yield fully equivalent measurements, and as a consequence no discrimination is usually made between them in assessment procedures. However, contrary to this presumption recent evidence from survey studies and from real exchange experimental tests shows that measures of values vary widely depending on which of the two bases is used. As an accounting of losses in economic welfare often figures prominently in the settlement of disputes and in the establishment of legal rules, this disparity can cause considerable ambiguity and lead to unintended and undesired outcomes: it can undermine negligence and nuisance determinations and project feasibility judgments, can bring about seriously incorrect assessments of losses and inadequate indemnification of damages, and can bias determinations over a range of other instances where measures of economic values are used.

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