Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value

Abstract

Besides possible income effects, measures of the maximum amounts people will pay to avoid a loss and the minimum compensation required for them to accept it are usually assumed to be equivalent. Unexpectedly large variations between these amounts, however, have been observed in survey responses to hypothetical options. The results are reported of a series of experiments that confronted people with actual money payments and cash compensations. These results demonstrate that the compensation measure of value appears to significantly exceed the willingness to pay measure, which would seem to raise doubt about various rules of entitlement, damage assessments, and interpretations of indifference curves. Any notable difference between the 2 measures could lead to ambiguity in the assessment of losses and in determining the desirability of changes in policies of resource allocations. Enlaces: