Willingness to accept, willingness to pay and the income effect

Abstract

The gap between willingness to pay (WTP) and willingness to accept (WTA) has previously been studied by searching for evidence of substitutability (the neoclassical hypothesis) or status quo bias, testing for neoclassical versus psychological theories of preferences. We study the gap differently, asking whether the observed pairs of WTA and WTP are consistent with neoclassical preferences. We use Sugden’s [Alternatives to the neoclassical theory of choice, in: I. Bateman, K.G. Willis (Eds.), Valuing Environmental Preferences: Theory and Practice of the Contingent Valuation Method in the US, EU, and Developing Countries, Oxford University Press, Oxford, pp. 152–180, Chapter 6] result, showing that the effect of income on WTP can be approximated from information on the ratio WTA/WTP. Drawing inferences from a meta-analysis of 201 WTA/WTP ratios, we conclude that the data are not consistent with neoclassical preferences.