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Willingness-to-Pay, Compensating Variation, and the Cost of Commitment
CARD Working Papers
  • Jinhua Zhao, Iowa State University
  • Catherine L. Kling, Iowa State University
Publication Date
8-1-2000
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.

Citation Information
Jinhua Zhao and Catherine L. Kling. "Willingness-to-Pay, Compensating Variation, and the Cost of Commitment" (2000)
Available at: http://works.bepress.com/catherine_kling/21/