Ruhr Economic Papers

Ruhr Economic Papers #832

WTA-WTP Disparity: The Role of Perceived Realism of the Valuation Setting

by Manuel Frondel, Stephan Sommer and Lukas Tomberg

RGS, RUB, RWI, 12/2019, 24 S./p., 8 Euro, ISBN 978-3-86788-965-0 DOI: 10.4419/86788965

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Abstract

Based on a survey among more than 5,000 German households and a single-binary choice experiment in which we randomly split the respondents into two groups, this paper elicits both households’ willingness to pay (WTP) for power supply security and their willingness to accept (WTA) compensations for a reduced security level. In accord with numerous empirical studies, we find that the mean WTA value substantially exceeds the mean WTP bid, in our empirical example by a factor of 3.56. Yet, the WTA-WTP ratio decreases to 2.35 among respondents who believe that the hypothetical valuation setting is likely to become true. Conversely, the WTA-WTP ratio increases to 3.81 among respondents who deem the setting unlikely. On the basis of these results, we conclude that inquiring about respondents’ perception of the realism of the valuation setting is an easy-to-implement and promising survey element to mitigate excessive WTA-WTP disparities, particularly if private or quasi-public goods are under scrutiny.

JEL-Classification: D12, H41, Q41

Keywords: Willingness-to-pay; willingness-to-accept; stated preferences

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