Jan 23, 2006
Munich Dissertations in Economics
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.