People report much larger willingness to accept (WTA) than willingness to pay (WTP) under a broad range of circumstances. This dissertation tries to answer the question when people will report this gap, how large the difference between the two answers will be and what reasons lie behind this behavior: We find that uncertainty about the desire to trade a good lies at the heart of the gap measured in experiments. A formal model extending Prospect Theory by “aversion to risk changes” predicts that the endowment effect increases with uncertainty. Data from our own behavioral experiment confirms the uncertainty hypothesis. When applied to a different phenomenon, so-called “Preference Reversal”, the model can predict when different types of the observed reversals occur, closing an explanatory gap that other theories have left open.

People report a larger willingness to accept than willingness to pay due to uncertainty about the desire to trade a good, which can be predicted using a model extending Prospect Theory.

Predicting the Gap between Willingness to Accept and Willingness to Pay

Key Takeaway: People report a larger willingness to accept than willingness to pay due to uncertainty about the desire to trade a good, which can be predicted using a model extending Prospect Theory.