Working Paper No. 02-10

A Theoretical Model Predicting the WTA-WTP Disparity: Public Policy Implications
Philip E. Graves
September 2002

ABSTRACT

A robust finding in economics is that decision-makers often exhibit a much smaller dollar willingness to pay (WTP) for an item than the minimum amount that they claim to be willing to accept (WTA) to part with it. The spread between these two numbers is particularly large for public goods, raising serious public policy concerns regarding which number, if either, is appropriate for valuing such goods. A number of explanations for this phenomenon have been advanced, each perhaps of relevance in particular settings, with little consensus being achieved as to whether any explanation satisfactorily resolves the problem. A traditional utility maximizing model is presented here that predicts that WTA will exceed WTP, quite plausibly by a substantial amount. Moreover, WTA, and not WTP, as the latter is traditionally measured, is seen to be appropriate for use in public policy decisions about increases in the supply of public goods. The central argument stems from a failure to properly value public goods by traditional methods. Since individuals cannot individually purchase public goods by generating income, they will under-generate any income that would have been devoted to public goods. The marginal WTP observed for such goods will, as a consequence, be understated in economic and survey data relative to true values. Moreover, the striking disparity between WTA and WTP for public goods provides support for the practical importance of economists' failure to properly value public goods.

JEL classification numbers: C91, D12, D81.
Keywords: decision making; choice behavior; public goods, willingness-to-pay; willingness-to-accept.

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