Publication Date

8-2000

Series Number

00-WP 251

Abstract

We present a dynamic model of an agent's decision to purchase or sell a good under conditions of uncertainty, irreversibility, and learning over time. Her WTP contains both the intrinsic value of the good and a commitment cost associated with delaying the decision until more information is available. Consequently, the standard Hicksian equivalence between WTP/WTA and compensating and equivalent variation no longer holds. This finding has important practical implications as it implies that observed WTP values are not always appropriate for welfare analysis.

Publication Information

This working paper was published as Zhao, Jinhua and Catherine L. Kling, "Willingness to Pay, Compensating Variation, and the Cost of Commitment," Economic Inquiry 42 (2004): 503–517, doi:10.1093/ei/cbh077.

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