A Comparison of the Impacts of Aspects of Prospect Theory on WTP/WTAEstimated in Preference and WTP/WTA Space

Abstract

The importance of willingness to pay (WTP) and its counterpart willingness to accept (WTA), in the evaluation of policy measures has led to a constant stream of research examining survey methods and model specifications seeking to capture and explain the concept of marginal rates of substitution as much as possible. Stated choice experiments pivoted around a reference alternative allow the specification of discrete choice models to accommodate aspects of Prospect Theory, in the particular reference dependence. This permits an investigation of theories related to loss aversion and diminishing sensitivitywidely documented within the literature. This paper seeks to examine a number of theoretical developments. In particular, the paper seeks to empirically examine a number of aspects related to decision making processes that are posited to exist by Prospect Theory, namely reference dependence, loss aversion and diminishing sensitivities. Unlike previous research which has examined these issues in the past, we examine these assumptions on WTP/WTA rather than on the marginal utilities of decision makers. In doing this, the paper simultaneously compares and contrasts different econometric forms, in particular estimating models in preference space with WTP/WTAs calculated post estimation versus models estimated directly in WTP/WTA space where WTP/WTAvalues are directly during estimation. We find evidence for reference dependence and loss aversion in WTP/WTA for different time attributes, however we find less compelling evidence for the existence of diminishing WTP/WTAs.