Title

Willingness-to-Pay, Compensating Variation, and the Cost of Commitment

Campus Units

Economics, Center for Agricultural and Rural Development

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2004

Journal or Book Title

Economic Inquiry

Volume

42

Issue

3

First Page or Article ID Number

503

Last Page

517

DOI

10.1093/ei/cbh077

Abstract

Hicksian welfare theory is static in nature, but many decisions are made in a dynamic environment. We present a dynamic model of an agent's decision to purchase or sell a good under the realistic conditions of uncertainty, irreversibility, and learning over time. Her willingness to pay (WTP) contains both the intrinsic value of the good as in Hicksian theory plus a commitment cost associated with delaying to obtain more information. The Hicksian equivalence between WTP/Willingness to accept (WTA) and compensating and equivalent variations no longer holds. The WTP and WTA divergence may arise and observed WTP values are not always appropriate for welfare analysis.

JEL Classification

D60, D83

Comments

This is a working paper of an article from Economic Inquiry 42 (2004): 503, doi:10.1093/ei/cbh077.