A META ANALYSIS OF WILLINGNESS TO ACCEPT AND WILLINGNESS TO PAY DISPARITY. * Assistant Professor of Marketing, Koç University, Istanbul, Turkey.

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1 Working Papers R & D A META ANALYSIS OF WILLINGNESS TO ACCEPT AND WILLINGNESS TO PAY DISPARITY by S. SAYMAN* and A. ÖNÇÜLER ** 2001/71/MKT/TM * Assistant Professor of Marketing, Koç University, Istanbul, Turkey. ** Assistant Professor of Decision Sciences at INSEAD, Boulevard de Constance, Fontainebleau Cedex, France. A working paper in the INSEAD Working Paper Series is intended as a means whereby a faculty researcher's thoughts and findings may be communicated to interested readers. The paper should be considered preliminary in nature and may require revision. Printed at INSEAD, Fontainebleau, France.

2 A Meta Analysis of the Willingness - to - Accept and Willingness - to - Pay Disparity Serdar Sayman Ayse Öncüler* October 2001 *Serdar Sayman is assistant professor of marketing, Koç University, Istanbul, Turkey (ssayman@ku.edu.tr). Ayşe Öncüler is assistant professor of decision sciences, INSEAD, Fontainebleau, France (ayse.onculer@insead.fr). The authors would like to thank to Joel H. Steckel, Mary Francis Luce, Jon Baron, and participants of a workshop at the Koç University for their comments on earlier versions of this paper.

3 A Meta Analysis of the Willingness - to - Accept and Willingness - to - Pay Disparity ABSTRACT Previous research reports a wide range of differences between the consumers willingness-to-accept (WTA) and willingness-to-pay (WTP) measures of valuation. In order to examine the factors affecting the size of this asymmetry, we conducted a meta analysis of the WTA WTP disparity figures reported in literature. In addition to integrating various explanations offered previously, we also investigate the effects of some factors which are not explicitly examined before. We find that a variety of rationaleconomic reasons, strategic misrepresentation, and psychological reasons contribute to the WTA WTP disparity. We offer suggestions for future research in this area.

4 1 Standard economic theory implies that the amount one is willing to pay in order to obtain a good is approximately equal to the amount she is willing to accept in order to relinquish the same good (Henderson 1941). However, empirical research offers substantial evidence of a disparity between individuals selling and buying prices. In one of the first studies that use both willingness-to-accept (WTA) and willingness-to-pay (WTP) measures, Hammack and Brown (1974) reported that waterfowl hunters were willing to spend only $247 more to continue hunting, but they required an average compensation of $1044 to sell their hunting rights. In the last three decades, numerous studies have reported that the WTA value is often considerably larger than the WTP value for the same good. The WTA-WTP disparity continues to be an avenue of interest (e.g., Anderson, Vadnjal, and Uhlin 2000). Previous studies have offered a variety of explanations for the asymmetric valuation of WTA and WTP. In this paper, we propose that the size of the WTA-WTP disparity depends on a number of different factors rather than just a single one or a few --- in addition to the usual suspect random variation. Our purpose is to examine the factors affecting the level of the WTA-WTP disparity by conducting a meta analysis. Meta analysis is a statistical analysis of a collection of results from individual studies (Glass 1976). The goal here is not only to integrate the prior findings and therefore to generalize from individual studies, but also to investigate some other factors that contribute to the WTA-WTP asymmetry, which are not explicitly examined before. A systematic meta analysis also helps guide future research in the area by pointing out issues that need further empirical investigation. WTA-WTP measures are the basis of contingent valuation method (CVM) which is used widely in public policy to measure the value individuals place on different goods

5 2 and activities. From a marketing perspective, valuation is an essential ingredient for a transaction between a buyer and seller. Buyers WTP relative to the sellers WTA determines key marketing variables such as utility, demand and price. Therefore, it is important to understand the factors that aggravate the WTA-WTP disparity. The paper proceeds as follows. In the next section we briefly review previous research on WTA-WTP valuations and discuss the main issues regarding the discrepancy. Then we will introduce our framework and present the hypotheses. The subsequent section describes the methodology and provides the results of the analysis. The paper ends with a summary and some suggestions for further research. BACKGROUND ON THE WTA-WTP DISPARITY The theoretical investigation of WTA-WTP comparison can be traced back to Henderson (1941). In this study, Henderson discusses alternative specifications of consumer s surplus and compensating variation, which are closely related to the WTP and WTA measures. Empirical research on WTA-WTP has its roots in the contingent valuation method studies which go back to early 60s (see Davis 1963). CVM assumes that the value of any good -- be it public or environmental -- can be stated in monetary terms. Surveys or interviews are used to elicit valuations for goods which are not usually traded in the market. Typically, in such a survey, respondents are asked how much they are willing to pay for a specific change in the characteristics of the good (or bad, and sometimes ugly). Until mid 70s, practitioners of CVM used only the WTP measure of valuation. Hammack and Brown s previously mentioned hunting permit study (1974) is

6 one of the first studies which used both the WTA and WTP measures of valuation and which observed a significant difference between the two values. 3 On a different research path, WTA and WTP values have been utilized to study decision-making under uncertainty. For example, in a comparative study on alternative expectation models, Coombs, Bezembinder, and Goode (1967) asked the buying and selling prices for different lottery tickets in a hypothetical setting. On average, the selling price was found to be more than twice the buying price. Later on, researchers began to conduct simulated markets or real exchange mechanisms by using normal (or market) goods as well as lottery tickets. In one of these studies, Knetsch and Sinden (1984) reported a WTA-WTP ratio of 4 for lottery tickets in a real exchange setting. In another study, Knetsch (1989) used a candy bar as the object of valuation and found a WTA-WTP ratio of 2. Prior research raises three related issues regarding the discrepancy. First, to what extent do these values differ from each other? As noted above, standard economic theory claims that in most cases, WTA and WTP values should be approximately the same (Henderson 1941). According to the economic theory, the WTA-WTP disparity is due to the income effect, and it should diminish as the price of the good becomes very small. However, empirical studies have shown that there is a significant disparity even for items like mugs or pens which are not unique goods and which do not create a strong income effect (see e.g., Kahneman, Knetsch, and Thaler 1990). Second, given the empirical evidence for the WTA-WTP disparity, which one is the correct measure of valuation? Mitchell and Carson (1989) claim that the validity of the WTA valuations is questionable because individuals show resistance to giving up

7 4 something they already have, especially for public goods, and it is hard to design successful studies using the WTA measure. Brookshire, Coursey, and Schulze (1990) also advocate using WTP rather than WTA. Their argument is that WTP is constrained by the consumer s budget, which is a more realistic situation. On the other hand, WTA may be more appropriate if the proposed transaction will result in a loss of the good, or a deterioration in the current situation (Fisher, McClelland, and Schulze 1988, p. 130). A related issue is the relationship among WTA, WTP and the certainty equivalent (CE) measure of valuation for risky items like lottery tickets. The results in this domain are mixed: In an experimental setting, Kahneman et al. (1990) report that the CE and WTP values are very close to each other, whereas WTA is more than twice both. Casey (1995) provides contradictory evidence: CE and WTA values are almost equal and significantly larger than the WTP. Even though the findings on the relationship between WTA, WTP and CE are mixed, there is a general agreement that WTP may be a better measure of valuation than WTA (see Garrod and Willis 1999 for a discussion). Third, how can we explain the empirical evidence for the WTA-WTP disparity? This question constitutes the focus of this paper and will be discussed in more detail below. In brief, empirical studies by and large focused on specific reasons for the WTA- WTP asymmetry. Extensive examination of factors that contribute to the disparity is rather sparse. In one of these studies, Hoffman and Spitzer (1993) put together a number of explanations for the WTA-WTP disparity and examined some implications. Their explanations for the disparity are income effect, psychological reasons (Prospect Theory and endowment effect, the need to close transactions, preference uncertainty, and regret avoidance), misrepresentation, and incorrect framing of questions. In a recent survey of previous empirical research, Brown and Gregory (1999) group the possible reasons into

8 5 two main categories: economic factors (income effects and substitution, transaction costs, implied value of the good, profit motives) and psychological factors (endowment effect, legitimacy, ambiguity and moral responsibility). Our goal in this paper is to go one step further and offer a more comprehensive analysis of the determinants of WTA-WTP disparity by using a meta-analytical framework. We present our theoretical framework and the hypotheses in the next section. THEORETICAL FRAMEWORK The goal of this paper is to integrate the explanations or factors offered by extant literature on the WTP-WTA disparity. In addition to the factors already examined by previous studies, we also offer additional explanations by building upon the existing literature. We examine the possible factors under three main headings: rational-economic reasons, strategic misrepresentation and psychological reasons. We note two things at this point. First, some factors or variables may pertain to more than one heading, and so we will discuss the factors from multiple angles wherever necessary. Second, because we adopt a meta analysis framework, our hypotheses below are limited to factors that are observable (or identifiable) from prior studies. For example, even though transaction costs are expected to contribute to the WTA-WTP disparity (Brown and Gregory 1999), empirical studies are designed in a way that transaction cost is not an issue. Hence, in this study we do not have a hypothesis regarding transaction costs. Rational Economic Reasons The first set of reasons for the asymmetric valuation involves rational or economic factors. Standard utility theory claims that the WTA-WTP disparity can be explained by

9 6 the income effect. Income effect refers to the fact that obtaining a good versus giving it away would take consumers to different final wealth points. The extent of this effect depends on the price of the good and availability of substitutes. Willig (1976) and Randall and Stoll (1980) derived upper and lower bounds for the WTA-WTP discrepancy as a function of price elasticities, consumer surplus and income levels. Based on Randall and Stoll s framework, Hanemann (1991) analytically shows that the WTA and WTP values should converge if the good at hand has a very close substitute. In other words, the WTA- WTP disparity will increase with decreasing substitutability. Therefore, income effect is more pronounced when substitutes are not available. Adamowicz, Bhardwaj, and Macnab (1993) report two experiments one of which supports Hanemann s substitution effect. In their first experiment they examined the effect of VCR ownership on the WTA-WTP difference for a specific movie feature shown only once. Subjects were also told that the feature was available on video. They found no effect of VCR ownership (means to the substitute) on the WTA-WTP difference. In their second experiment, they asked the subjects their WTA and WTP figures for a hockey game ticket. In the first treatment, it was told that the game would also be broadcast live (which is a substitute). In the other treatment, subjects were told that they could only watch the game in the field (hence, no substitutes). On average, the difference between WTA and WTP was 30% smaller in the substitute condition, compared to the no-substitute condition. These findings lead us to the following hypothesis: H1: The WTA-WTP disparity will be higher when there is no readily available substitute for the good. Another factor that may affect the WTA-WTP disparity is whether the good is

10 7 available or traded in the market. Market goods imply some degree of price awareness and experience with the transaction. On the other hand, non-market goods can be characterized by a range of valuations. In this case, rational buyers will look to the lower values, and sellers will look to the higher end, which will increase the WTA-WTP disparity (Brown and Gregory 1999). This behavior can also be linked to regret avoidance (Loomes and Sugden 1982). Individuals may opt to report higher selling prices and lower buying prices to be on the safe side. In addition, individuals may not have fully constructed preferences or values for non-market goods. Kolstad and Guzman (1999) claim that an ambiguity about the value of the good and the cost of gathering information cause an individual to overstate her WTA value and understate the WTP value. Therefore, we expect the disparity to be higher for non-market goods: 1 H2: The WTA-WTP disparity will be higher for non-market goods. The WTA-WTP discrepancy could be observed even for familiar items like pens and mugs (e.g., Harless 1989; Kahneman et al. 1990). Coursey, Hovis, and Schulze (1987) argue that one way to eliminate the WTA-WTP disparity is utilizing repeated trials for experience. Learning or experience may help develop preferences because individuals are generally not familiar with the valuation tasks -- especially the WTA valuation. If respondents have an opportunity to evaluate the consequences of their valuation decisions over a series of trials, they may develop preferences. Particularly in incentive compatible designs (see the discussion below), they are expected to learn that revealing true preferences is the best strategy. 1 Note that a market good does not necessarily have substitutes. For instance, a university mug is a market good; yet, a student will not accept a regular mug as a substitute.

11 8 Empirical evidence regarding the effect of learning on the WTA-WTP disparity is mixed. For example, Shogren et al. (1994) obtained almost equal WTA and WTP values after a series of trials. On the other hand, Kahneman et al. (1990) observed no significant decrease in the disparity after respondents gained experience. Nonetheless, we expect a smaller WTA-WTP disparity if values are elicited after the respondents gain experience: 2 H3: The WTA-WTP disparity will be lower if respondents have gained experience in the valuation task. In some empirical studies respondents are provided with the price of the good at hand. Obviously, for market goods, even if the price is not stated explicitly, respondents may have some idea about it. If individuals are not informed or uncertain about the price, it makes economic sense to report low WTA values and high WTP values. The extent of price ambiguity also opens room for strategic behavior, and increases the WTA-WTP discrepancy. There is also a psychological effect of providing the price of the good valued. Various experimental studies on anchoring effect have shown that individuals tend to be biased towards any given value, even when it is arbitrary (see Kahneman, Ritov, and Schkade [1999] for a review on anchoring effects in CV practice). Price, when given, may have an anchoring or priming effect serving as a signal of fair value. Individuals will consider WTA and WTP values as deviations from this anchor, and hence the disparity will be lower. To our knowledge, the following hypothesis regarding the effect of price availability is not examined before: H4: The WTA-WTP disparity will be lower when subjects are provided with the price of the good. 2 In this study, we define learning as the experience in the valuation of the same good under the same conditions. Although the number of trials that counts as experience could be subjective, we consider

12 9 Strategic Misrepresentation Another explanation for the WTA-WTP disparity is individuals strategic motives. Rather than revealing their true valuations, they may overstate the selling price and understate the buying price because of bargaining habits or profit motives (Knez, Smith, and Williams 1985). This may be a problem especially if the valuations are used to guide a public policy issue. For example, when individuals assume that they can free ride on the contributions of others and still benefit from the good, such as environmental quality, they may understate their WTP valuation. Factors that would affect the extent of strategic motives and misrepresentation essentially pertain to the study design. Researchers occasionally try to align the incentives of the respondents in a way that it is for their own interests to reveal true valuations. Therefore, strategic misrepresentation of valuations should disappear in incentive-compatible designs such as preference revealing or real exchange mechanisms. For instance, a Vickrey auction where the highest bidder wins but pays the second highest bid is a preference revealing mechanism for the allocation of a good (Vickrey 1961) -- see Harless (1989) for an example. An alternative mechanism is market clearance. In an experimental setting, Kahneman et al. (1990) employed such a mechanism where the WTA and WTP prices determine the demand and supply in the simulated market. In this study, we distinguish between the preference revealing and realization of exchange characteristics of incentive-compatible designs. A preference revealing mechanism is a design which is presumed to induce the revelation of true valuations. respondents as experienced if data is obtained after four or more trials. This is by and large consistent with the existing literature.

13 10 Realization of the exchange means that the transaction actually takes place between a buyer and a seller. It is possible to employ a preference revealing mechanism like a Vickrey auction, but not to carry out the exchange. Realization of the exchange, on the other hand, is employed as a preference revealing mechanism. 3 A widely used approach in experimental economics is to actually carry out the transaction for a subset of respondents in order to elicit true preferences. One empirical study which looks at the effect of such design issues is by Neill et al. (1994). They compared the WTP values from three different designs: a CVM, a hypothetical Vickrey auction, and a real exchange Vickrey auction. 4 They found that the average WTP values from CVM and hypothetical Vickrey auction are similar and they are both significantly higher than the WTP of the real exchange auction group. In other words, there is evidence that what matters is the realization of the exchange, not the mechanism itself. It is not clear whether this argument will hold for the WTA-WTP disparity. We expect both dimensions of incentive-compatibility to decrease the WTA-WTP disparity: H5a: The WTA-WTP disparity will be lower when there is a preference revealing mechanism. H5b: The WTA-WTP disparity will be lower when the exchange is actually realized. Another factor that would mitigate strategic misrepresentation is the use of iterative bidding when the survey design. Consumers valuations are typically obtained through open-ended questions like how much are you willing to pay? or alternatively by using multichotomous answer formats or payment cards where respondents make a choice 3 4 Realization of the exchange in a mechanism which is not preference revealing (e.g. first-price auction) is a possibility; to our knowledge there is no application in the WTA-WTP research. Note that CVM is not an incentive-compatible design.

14 11 from a list of figures. Some studies involve asking the respondents whether they would pay (accept) a revised amount which is higher (lower) than the initial responses. The purpose is to elicit the maximum WTP and the minimum WTA. Therefore, we expect iterated questions to yield a lower WTA-WTP disparity. 5 H6: The WTA-WTP disparity will be lower when the empirical procedure involves iterative bidding. One way to obtain WTA and WTP figures is to ask both measures to the same group of respondents -- a within-subjects design. Alternatively one may employ a betweensubjects design and ask a group of respondents their WTA values and another group their WTP values. When an individual provides multiple measures in a study, it is possible that she may try to be consistent (Camerer 1995). Therefore, in a within-subjects design respondents may provide less disparate WTA and WTP values. A within-subjects measurement would probably prime respondents to provide selling prices larger than buying prices but these prices should not be markedly different. Therefore, we expect the WTA-WTP disparity to be smaller if a within-subjects design is used as opposed to a between-subject one. H7: The WTA-WTP disparity will be lower in a within-subject design. Psychological Reasons WTA-WTP disparity implies that the value of a good depends on whether the individual is going to give the good away or receive it. In other words, possession of a 5 The effect of using a multichotomous format as opposed to an open-ended question is not clear. Cameron and James (1987) argue that open-ended questions yield more strategic responses from respondents and the questions requiring yes / no answers are the most similar ones to the actual market experience. In order to obtain average valuations from a single yes / no question, researchers vary the

15 12 good increases its value. Behavioral decision theorists explain this phenomenon by the endowment effect which is a manifestation of the loss aversion property of the Prospect Theory (Kahneman and Tversky 1979; Thaler 1980). According to the Prospect Theory, a loss would yield a larger (in magnitude) discomfort than the value of a commensurate gain. Therefore, when an individual is asked to give up a good she owns, she will demand a high WTA to compensate for the feeling of loss associated. On the other hand, WTP will be a measure of the value obtained through gaining the good (Kahneman et al. 1990). One may also offer a rational / economic rather than psychological explanation for the effect of ownership. In real settings owners are more likely to be the ones who value the good more and have more information regarding the good (Casey 1995). However, this argument seems to be less relevant for empirical studies where WTA and WTP questions are asked to randomly drawn respondents. Some experimental studies involve the physical distribution of the good to the respondents (e.g., coffee mugs in Kahneman et al. 1990). In other cases, respondents value goods that they already have or consume, e.g., odor from a nearby meat plant. Our definition of possession involves the property rights to the good. When respondents participate in a real exchange lottery, what matters is the property right, not the actual possession of the ticket. We do not count mere physical examination of the good (or sampling) as possession. Rather, it is assumed to be a means for consumers to gather information. Kahneman et al. (1990) note that physical possession of the good produces a stronger endowment effect than the chance of receiving the good, or a property right to it; we are not concerned about such different degrees of endowment effect. We argue that amount stated across respondents, and estimate the value based on certain assumptions. As will be discussed later, we do not include valuations based on yes / no questions in our empirical analysis.

16 possession of the good would increase the WTA-WTP disparity as compared to hypothetical ownership H8: The WTA-WTP disparity will be higher if the individuals own the good. Prospect Theory and mental accounting (Thaler 1985) argue that valuation depends on the form or the framing of the question. WTA is typically elicited by asking consumers the compensation they would seek to give up the good -- assuming that they already possess the good. Similarly, WTP is obtained by asking respondents the amount they would pay to obtain a good or improvement. However, both WTA and WTP values can be framed as a loss or gain. For example, one might elicit the WTP in one of the following ways: (i) respondents are told to assume that they do not possess the good, and they are asked how much they are willing to pay to acquire it; (ii) they are told that they possess the good, but they have to pay not to lose it. The former is a gain frame whereas the latter is a loss frame. Similarly the following constitute the gain and loss frames for the WTA measure: (i) respondents are asked how much they would accept not to trade up or have an improvement in the good; (ii) they are asked to state the WTA to give up the good or trade down. Loss aversion property of Prospect Theory suggests that loss framing increases the stated value; therefore, the WTA-WTP disparity should be higher if selling (WTA) is framed as a loss and buying (WTP) is framed as a gain (see McClelland and Schulze 1991). On the other hand, using a loss-loss frame should increase both WTA and WTP, and it is not clear whether a loss-loss frame would result in a higher disparity than a gain- 6 Note that according to our definition, realization of exchange implies possession, but not vice versa.

17 14 gain frame. 7 H9a: The WTA-WTP disparity will be higher if WTA is framed as a loss. H9b: The WTA-WTP disparity will be higher if WTP is framed as a gain. Another implication of mental accounting that may affect the WTA-WTP disparity is the payment mechanism. Thaler (1985) argues that consumers have different mental accounts for payments depending on where the money comes from and where it goes. So, for example, a windfall earning is spent differently than earned money. Similarly, out-ofpocket costs create more disutility than opportunity costs (Thaler 1980). We argue that the payment mechanism affects the WTA-WTP disparity. Consider a case where the payments are reductions (WTA) and increases (WTP) in tax payments. We argue that WTA and WTP will be integrated (see Thaler 1985) to the tax (loss) account whereas payments in and out-of-pocket are segregated. Because the value function is less convex for losses away from the origin (reference point), a further reduction and increase in the loss (tax) will loom comparable utility changes. On the other hand out-of-pocket costs and in-pocket gains will lead to disparate utility changes. Therefore, we expect the disparity to be higher if the payments are in and out-of-pocket as opposed to tax increases / reductions, or other instruments of payment. H10: The WTA-WTP disparity will be higher when the payments are in and outof-pocket. 7 Irwin (1994) suggests that WTA WTP disparity should be greater in the loss-loss frame than in the gain-gain frame; however, her empirical findings do not support this conjecture. Casey (1995) also uses the gain-loss framing concept, and examines whether the WTA-WTP disparity could be explained by different transaction encoding rules for buying and selling. For example, the buyer of a lottery ticket may perceive the money given as a loss and the lottery as a gain. Alternatively, buyers and sellers may use different weight and value functions (corresponding to the subjective probability and utility function in utility theory). He provides evidence that buyers and sellers of a lottery have similar weight and value functions, but the individual s role determines the encoding process.

18 15 Another factor that can influence the WTA-WTP disparity is risk preferences. Individuals valuations may change when the good in hand involves risky. In a recent study, Sheffrin and Caldwell (2001) focus on the valuation of lotteries. They develop two hypotheses based on a change-of-process framework (Mellers et al. 1992) and analyze a set of binary lotteries in order to test these. The first hypothesis is that the WTA-WTP disparity should decrease as the probability of the nonzero outcome increases. This follows from the theoretical framework where WTA and WTP are functions of the individual s utility from the nonzero outcome, and the subjective weighting of the probability of the outcome. Their second hypothesis based on the theoretical model is that the disparity should be independent of the absolute value of the nonzero outcome. 8 They found support for the first hypothesis and mixed results for the second one. In another study, Casey (1994) elicited the WTP values for a set of different lotteries and found that the buying prices are significantly below the expected values. This finding holds even for lotteries with probability of winning close to 1. The ratio of WTP to the EV increases as the probability of the nonzero outcome decreases. He proposes that this is due to loss aversion-- the possibility of losing the amount paid to obtain the lottery induces loss aversion and motivates the individuals to lower their buying prices. In addition, he found evidence that losing the purchase price and receiving the risky good are encoded into separate mental accounts. Hence, our next hypothesis is: 9 H11: The WTA-WTP disparity will be higher for risky goods or payoffs. WTA-WTP discrepancy may also increase when there is an emotionally difficult 8 We do not include this hypothesis in our study because the value of the non-zero outcome is related to the price of the good and this figure is not always available. We believe that this hypothesis deserves further testing.

19 16 trade-off. Brown and Gregory (1999) argue that if the decision involves a potential for regret, for example because of later observing a higher price than the own WTA, individuals may ask for a premium to decrease that possibility. Or if there is moral responsibility, the status-quo (inaction) becomes a more attractive option, increasing the disparity. For instance, if there is a decision to be made about environmental quality, even though one can be reluctant to pay more for improving the quality, she will resist in giving up the existing level of environmental quality and would therefore ask for a higher WTA value. In order to test the impact of such concerns, we use three different measures. The first one is perceived illegitimacy. We understand perceived illegitimacy as a sense of moral and ethical responsibility (i.e. conscience, altruism). As discussed above, if selling or giving up a good is perceived as an illegitimate transaction, WTA-WTP disparity is expected to increase mainly due to higher WTA values. Rowe, d Arge, and Brookshire (1980) point out that perceived illegitimacy of a transaction might cause extraordinarily high WTA values since people would not want to be seen as selling the environmental good. Empirical evidence supports this claim. Boyce et al. (1992) show that the difference between WTA and WTP increases if the transaction involves a sense of moral responsibility (especially for environmental goods). In their study, they use the term intrinsic values to imply: nonsubstitutability (uniqueness), irreversibility, feeling of sentimentality, sense of moral responsibility. They used small pine trees as the experimental object. For the moral responsibility manipulation, they told the subjects that the trees would be killed if the subject failed to purchase the tree or to sell back to the experimenter. A higher WTA-WTP ratio for the kill condition is reported compared to 9 In the meta analysis below, we do not account for different degrees of risk involved; we use a binary

20 17 the no-kill condition. More specifically, in the kill condition, the increase in WTP is smaller compared to the increase in WTA, widening the WTA-WTP gap. Their argument is that if one owns the tree, she has the responsibility. If not, the owner has the responsibility. The property rights shift responsibility to the owner so the buying price does not increase as much as the selling price. Irwin (1994) also states that a moral responsibility causes higher preference for environmental goods in the selling mode. 10 These findings lead to our next hypothesis: H12: The WTA-WTP disparity will be higher when the exchange is perceived as an illegitimate transaction. Related to the same issue, another observed measure is whether the good is environmental or not. Environmental goods involve a sense of moral responsibility but they are not necessarily non-market goods. For example, pine trees can be bought in the market. Irwin (1994) reports that the relative preference of an environmental good to a market good is higher in the selling mode (WTA) than in the buying mode (WTP). She provides supporting evidence for this claim. She found that WTA for environmental goods is higher than the WTA for market goods, even though the WTP values do not differ that much. Therefore: H13: The WTA-WTP disparity will be higher for environmental goods. Our last measure regarding emotional difficulty is whether the good is health related or not. One s health and safety is presumably the least substitutable good. WTA- 10 WTP disparity should increase if the transaction has an effect on health. Unlike other nonvariable which represents the existence of risk. It is conceivable that this argument may also apply to nonenvironmental goods. For example, one would not want to sell the pictures of her family.

21 18 substitutable goods, health has a direct and pervasive effect on consumer s life. Brown and Gregory (1999) argue that one s health and general safety also involves ethical and legitimacy dimensions. Brief examination of the results of Chapman and Johnson (1995) indicates that the WTA-WTP disparity is generally higher for health related items than for commodity items. H14: The WTA-WTP disparity will be higher for health related transactions. ANALYSIS Data Meta analysis is a systematic review of previous findings. To that end, we searched several databases, and then we traced the references of the first set of studies identified. Eventually we used 143 data points from 32 studies which report both the WTA and the WTP measures of valuation (or the WTA WTP ratio which is sufficient for our analysis). Studies which report only the percentages of respondents which value the good above or below a certain monetary amount are not suitable for our purposes. Furthermore, studies that estimate WTA and WTP values from percentages are not included in the analysis (e.g., Knetsch and Sinden 1984). We present the studies used in the meta analysis in Table A1 in the Appendix. Figure 1 shows the distribution of WTA WTP ratios for the 143 data points. The WTA WTP ratio exhibits substantial variation extending from 0.14 to 113. Note that a ratio of 0.14 implies that the selling price is much less than the buying price --- dropping this data point does not affect our findings. There are 3 other data points with WTA WTP ratios less than, but close to, 1. The sample mean of the ratios is 7.67, and the median is In

22 19 addition to the high positive skewness, there are a few data points with substantially high WTA WTP disparities. The goods used in prior research range from chocolate bars to elk hunting permits Insert Figure 1 about here Methodology The first step our analysis entails an ordinary least squares regression model with the following variables. Dependent Variable. We use the natural logarithm of the WTA / WTP ratio as the measure of WTA-WTP disparity. We obtain the ratio by dividing the average WTA by the average WTP of the respondents. Note that this is different than the average of (WTA / WTP) which requires within subjects measures of WTA and WTP. One study in our data set reports only the average of respondents WTA / WTP ratios (Harless 1989). He reports that the average of WTA-WTP ratios is larger than the ratio of average WTA / average WTP, but he does not provide the latter measures. In addition, some studies provide only median values for the WTA and WTP measures. 11 Even though the medians are generally smaller than the means, the ratio of medians is fairly close to the ratio of means. 12 Using ln(wta / WTP) as the dependent variable has three benefits. First, using the absolute difference between the WTA and WTP would be inappropriate because this difference depends on the price level of the good. Second, using the natural logarithm avoids the problem of whether to use the WTA / WTP ratio or the WTP / WTA ratio; the Chapman and Johnson (1995) chose to report the geometric means of the WTA and WTP figures. We replicated the analysis with a dummy variable representing whether the measure was a median or average; this variable was insignificant and did not affect the estimates for the other factors.

23 20 explained variation and the significances of the variables do not change by taking the logarithm of either ratio. Third, ln(wta / WTP) exhibits a more symmetric distribution compared to WTA / WTP. Explanatory Variables. For the explanatory variables, we use the 16 observed measures described in the theoretical framework. All the explanatory variables are binary. Some of the explanatory variables represent characteristics of the goods used in prior research. Because the classification of goods (hence, each data point) according to these variables could be subjective, two judges independently coded these binary variables for all the data points. Initial agreement between the judges codings was 95%, and all the remaining disagreements were resolved through discussion. Using the explanatory variables presented above and ln(wta / WTP) as the dependent variable, we conducted an OLS regression analysis. The resulting R 2 is 0.44 and the adjusted-r 2 is Although the primary concern is the significance of the variables, explained variation is typical for a meta analysis. Examples of meta analyses in marketing include Peter and Churchill (1986) with and R 2 of 0.25, and Assmus, Farley, and Lehmann (1984) with R 2 of Results of the regression analysis are presented in Table 1 below Insert Table 1 about here All the parameter estimates have the expected signs. Six of the explanatory variables are not significant at p < 0.10 level. Anscombe s test does not suggest the existence of heteroskedasticity. However, multicollinearity diagnostics suggest a potential problem. There are high correlations between (i) substitutability and market good (r = 0.78), (ii) realization of exchange and preference revealing mechanism (r = 0.85), (iii)

24 21 environmental and perceived illegitimacy (r = 0.65). The correlation between realization of exchange and possession of the good is also worth noting (r = 0.59); this is a practical correlation, in the sense that if an exchange is realized, the good must have been possessed in the first place. Principal component analysis suggests a similar pattern; each pair of variables above have the highest loadings on one of the first three factors. In any case, multicollinearity leads to inefficient, yet unbiased, estimates. Rather than reducing variances (e.g., by Ridge regression) or dropping variables, we present the results as they are. The reader will correctly guess that when we drop substitutability, market good becomes significant and vice versa; likewise, environmental becomes significant if we drop perceived illegitimacy, and preference revealing becomes significant if realization of the exchange is dropped. However, dropping variables will result in biased coefficient estimates. We checked the sensitivity of the parameter estimates to the deletion of observations. We deleted each observation in turn, and obtained a different set of coefficients. It turns out that the variances from this jackknife distribution are pretty small; in fact, only the coefficient for preference revealing changes sign 1% of the time. We replicated this sensitivity analysis by deleting 5 observations randomly (with replacement) a large number of times. In this case, preference revealing changes sign 10% of the time. Deleting 10 data points leads to a higher percentage of sign reversal (25%) for the coefficient of preference revealing, and a few other estimates also change direction 1% of the time. This exercise also serves as a diagnosis for possible problems resulting from dependence of some data points. Note that there are two sources of dependence in our data set: (i) obtaining valuations from the same set of respondents for different goods (multiple treatment studies); and (ii) reporting results from different sets of respondents --- same or

25 different goods --- in the same paper. It seems that the direction of the effects are pretty robust against the dependence of data points. 22 Before discussing the regression findings, we would like to report the second step of our analysis. We undertook a structural equations approach where substitutability and market good are assumed to be items for a construct; we call this normal goods. Similarly, realization of exchange and preference revealing are items for incentive compatible designs, and environmental and perceived illegitimacy are items for intrinsic values. Due to the nature of the specification, estimates for other factors are identical to the regression estimates but with lower standard errors. In fact, only two factors now have significances (two-sided) higher than Results of the structural equations approach using the Amos software is presented in Table Insert Table 2 about here Discussion Results of the two analyses together provide evidence that substitutable goods yield smaller WTA-WTP disparities. This finding is in accord with Hanemann s (1991) suggestion. Similarly, the disparity is smaller for market goods. A highly significant variable is learning which helps decrease the disparity. This is consistent with the economists view that the disparity should disappear through market experience or learning. However, some studies report that the disparity does not disappear for market goods (e.g., Kahneman et al. 1990), or in public good auction mechanisms (Brookshire, Coursey, and Schulze 1990) after a number of trials. It is also conceivable that for readily available market commodities, consumers have sufficient experience -- at

26 23 least in buying. Hence, if the traditional economics argument were true, we should not observe the disparity for those commodities -- even without learning in the course of the study. It seems more appropriate to say that learning would decrease the disparity, but may not totally remove it. We did not find sufficient evidence for the effect of stating the price of the good to the respondents explicitly. We note that in all the cases, except one, where the price is given, the respondents are students and the goods are items like coffee mugs, chocolate etc. One exception is a Smith auction for the density of park trees for which the critical cost (value) is provided to the individuals. And so, the respondents already have some price knowledge, and stating a figure may not have an additional effect. It is conceivable that what matters is not the statement of the price, but price knowledge. Price knowledge is an unobservable measure but it is partly captured by the market good variable. Using incentive compatible designs significantly reduces the disparity. The structural equations approach suggests that both the realization of the exchange and employing a preference revealing mechanism align the individuals incentives and they tend to provide less disparate measures of WTA and WTP. This finding indicates that individuals strategic motives play a certain role when they provide valuation measures. If one assumes that incentive compatible designs lead to more correct valuations, we provide further support for validity of these mechanisms in behavioral studies. Other study design characteristics that relate to strategic behavior are also significant. Iterative bidding decreases the WTA-WTP discrepancy, which is not surprising. Similarly, employing a within-subjects design reduces the WTA-WTP disparity. Individuals might try to be consistent, or provide fair prices, when they state

27 24 both values. Our findings also indicate that possession of the good has an effect on the disparity. This variable is highly significant in the structural equations model. Hence, we find support for the endowment effect explanation of the WTA-WTP disparity. On the other hand, Carmon and Ariely (2000) report that WTA-WTP disparity does not depend on whether the respondents actually own NCAA basketball tickets or they are told to assume that they own them. It may be interesting to examine the conditions under which hypothetical ownership does not make a difference. For instance, tickets may be considered as means to some other good, and both the actual and hypothetical owners may be valuing the expected utility from the basketball game. We also find evidence that gain-loss framing for buying and selling transactions have significant effects on the WTA WTP disparity. More specifically, if selling is framed as a gain rather than a loss, consumers demand a lower WTA, and the disparity is smaller. On the other hand if WTP is framed as a gain, the disparity is higher. In other words, when buying is framed as a loss, individuals are not willing to pay as much. These findings support the loss aversion explanation of the WTA WTP discrepancy. Relative sizes of the effects are consistent with Fisher et al. (1988); they reported a WTA WTP ratio of 2 for the loss-loss condition as opposed to a ratio of 1 for the gain-gain frame. We should note that Irwin s (1994) findings do not back this evidence. The means of payment also effects the WTA WTP discrepancy. More specifically, if the payments are into or out-of-pocket, rather than through tax reductions etc., we observe a larger WTA WTP disparity. We did not find evidence for the effect of risky goods or payoffs. We should note

28 25 that risky goods in our data set are either lotteries or health related items for which we have a variable. One possible explanation for lotteries is that increasing risk may aggravate the WTA WTP disparity, but goods like lotteries may have a lower disparity in the first place (see Camerer [1995], p. 668). Therefore what we are observing may be the result of two opposite effects. One limitation of the current study is that we do not address varying degrees of risk. We find evidence that perceived illegitimacy of the transaction and environmental goods increase the WTA-WTP disparity. Intuitively, one might think that a sense of moral responsibility or intrinsic values should also result in a higher WTP value as well as the WTA. Boyce et al. (1992) state that there is an asymmetric assignment of moral responsibility in WTA and WTP conditions. They claim that in the WTP condition individuals may perceive the responsibility as resting with the experimenter (in their experiment if the individual fails to buy the pine tree, the experimenter would destroy it). Finally, the WTA WTP disparity is significantly higher for health related goods or items. Individuals demand high WTA values for things that affect personal health because the losses are difficult, if not impossible, to compensate or replace in this domain. SUMMARY AND FURTHER SUGGESTIONS In this study, we examined the factors contributing to the WTA-WTP disparity by conducting a meta analysis of the previous findings. Our analysis suggests that substitutable and market goods, experience in the valuation task, incentive compatible designs, iteration of the valuation question, within-subjects designs, and framing of the selling question as a gain lead to a decrease in the WTA-WTP disparity. On the other

29 26 hand, possession of the good, framing of the buying question as a gain, in and out-ofpocket payments, perceived illegitimacy in the transaction and environmental goods, and health related goods increase the disparity. Our contribution is twofold. In addition to the systematic analysis of the previous findings, we also examined the effects of some variables or conditions that were not examined explicitly by prior research; namely, we examined iterative bidding, providing the price, in and out-of-pocket payments, and the within / between-subjects nature of the design. Two issues that need to be considered in a meta analysis are significance of prior findings and a file drawer bias. Significance of each data point is related to the sample size used in the corresponding study. This can be addressed by employing a weighted least squares estimation where weights are the sample sizes. 13 When we run a WLS regression the results are similar except for a few variables. We should note that samples sizes in our data set range from 8 to Hence, a few studies with large sample sizes tend to drive the results of this exercise. In terms of the file drawer or publication bias, due to the nature of this area, previous studies report similar WTA and WTP values, as well as disparate ones. Hence, we believe that publication bias is not a serious issue in our case. The present analysis is not without limitations. First, variables that capture the goods characteristics are binary variables. It is conceivable, for example, that substitutability is a continuous variable. Even the definition of environmental has shades of gray. Are ecologically produced eggs environmental as much as air quality? However, we believe that assigning continuous values for these variables would amplify the subjective nature of the coding process. Secondly, we employed a linear model without 13 More specifically, weights should be inversely proportional to the error variance of the dependent variable. Since we use ln(wta / WTP) as the dependent variable, deriving the weights is not