Reference Dependence Effects on WTA and WTP Value Functions and Their Disparity

Abstract

In this study we investigate two reference dependence effects in a choice experiment. The first is the effect of the well-known distinction between gains and losses, the second is the effect of changing the reference value on willingness to pay (WTP) and willingness to accept (WTA). The latter has to our knowledge not been studied before. We hypothesize that there are differences between WTA and WTP, and that both value functions and their disparity are affected by the absolute value of the reference point. We test our hypotheses using a choice experiment with trade-offs between changes in flood probabilities and costs. The choice experiments elicit WTP and WTA, using two flood probability reference values, yielding four separate value functions. Our findings show that a substantial WTA-WTP disparity exists, and that this disparity increases when moving away from the reference point. Also, both WTA and WTP value functions are affected by the flood probability reference value, and the WTA-WTP disparity increases when the flood probability reference point increases. Both findings suggest that welfare effects caused by changes in public good provision depend not only on the direction of change (loss aversion), but also the reference value. Moreover, our results show that the latter effect is larger for losses than for gains. We introduce the concept of reference point updating as a possible explanation for these findings.

A generic marginal value function for natural areas

“…There also is a growing number of choice experiment studies that aim to value natural areas and land use change (for recent contributions see, e.g. Bateman et al 2009;Colombo et al 2007;Colombo and Hanley 2008;Scarpa et al 2007;Schaafsma et al 2012Schaafsma et al , 2013Koetse and Brouwer 2015). A common feature of these studies is that they attempt to value changes to an existing natural area or ecosystem.…”

Evaluation of households’ willingness to accept the ecological restoration of rivers flowing in china

“…Meanwhile, if individuals base their valuations of a change on a reference of the changed state, the appropriate welfare measurement is then the equivalent variation (WTA). Koetse et al's study supports Knetsch' point and suggests that welfare effects due to changes in public good provision depend not only on the direction of change (loss aversion), but also on the reference value [4].…”

Effects of payment vehicle non-attendance in choice experiments on value estimates and the WTA–WTP disparity

“…Data for experiment 2 are obtained from a study carried out around the IJsselmeer, one of the largest freshwater buffers in Europe (for details, we refer to Koetse and Brouwer 2016). This buffer is used Koetse, Verhoef, and Brander (2016).…”

“…Li and Hensher 2011), health economics (e.g. Chilton et al 2012;Viscusi and Huber 2012) and environmental economics (Mansfield 1999;Koetse and Brouwer 2016). Another set of explanations are provided by the literature on the effects of bounded CONTACT Mark J. Koetse mark.koetse@vu.nl rationality, decision heuristics and decision anomalies, on choices made in hypothetical markets (for an overview, see Leong and Hensher 2012).…”