Skip to main content Accessibility help

Implications of the WTP–WTA Disparity for Benefit–Cost Analysis

  • James K. Hammitt (a1) (a2)


Differences between estimated willingness to accept compensation (WTA) and willingness to pay (WTP) that are larger than can be explained by standard economic theory raise questions about which measures should be used for benefit–cost analysis (BCA). These differences do not create a new problem but accentuate an existing one: the fact that the Kaldor–Hicks compensation test is ambiguous when its two components conflict. This conflict is more likely when the difference between WTA and WTP measures of a change is large. In many cases, the same individuals receive benefits and incur costs from a policy change and their preferences for the policy cannot depend on whether they ask whether their WTP for the benefit exceeds the cost they will incur or their WTA to forgo the benefit exceeds the cost they will save. In cases where benefits and costs are incurred by different people, it seems more useful to evaluate the fundamental question – whether the benefits to some justify the harms to others – than to obscure this question through a technical debate about valuation measures.



Hide All
Adler, M. (2012). Well-Being and Fair Distribution: Beyond Cost-Benefit Analysis. Oxford: Oxford University Press.
Bernheim, B. D. & Rangel, A. (2009). Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics. Quarterly Journal of Economics, 124, 51104.
Flores, N. E. & Carson, R. T. (1997). The Relationship between the Income Elasticities of Demand and Willingness to Pay. Journal of Environmental Economics and Management, 33, 287295.
Freeman, A. M. III (1993). The Measurement of Environmental and Resource Values: Theory and Methods. Washington, DC: Resources for the Future.
Guzman, R. M. & Kolstad, C. D. (2007). Researching Preferences, Valuation and Hypothetical Bias. Environmental and Resource Economics, 37, 465487.
Hammitt, J. K. (2013). Positive Versus Normative Justifications for Benefit-Cost Analysis: Implications for Interpretation and Policy. Review of Environmental Economics and Policy, 7, 199218.
Hanemann, W. M. (1991). Willingness to Pay and Willingness to Accept: How Much Can They Differ? The American Economic Review, 81, 635647.
Horowitz, J. K. & McConnell, K. E. (2002). A Review of WTP/WTA Studies. Journal of Environmental Economics and Management, 44, 426447.
Isoni, A., Loomes, G. & Sugden, R. (2011). The Willingness to Pay-Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment. American Economic Review, 101, 9911011.
Kahneman, D., Knetsch, J. L. & Thaler, R. H. (1990). Experimental Tests of the Endowment Effect and the Coase Theorem. Journal of Political Economy, 98, 13251348.
Knetsch, J. L. (2010). Values of Gains and Losses: Reference States and Choice of Measure. Environmental and Resource Economics, 46, 179188.
Knetsch, J. L., Riyanto, U. E. & Zong, J. (2012). Gain and Loss Domains and the Choice of Welfare Measure of Positive and Negative Changes. Journal of Benefit-Cost Analysis, 3(4), Article 1.
Linneman, P. (1980). The Effects of Consumer Safety Standards: The 1973 Mattress Flammability Standard. Journal of Law and Economics, 23, 461479.
Mitchell, R. C. & Carson, R. T. (1989). Using Surveys to Value Public Goods: The Contingent Valuation Method. Washington, DC: Resources for the Future.
Plott, C. R. & Zeiler, K. (2005). The Willingness to Pay–Willingness to Accept Gap, the ‘Endowment Effect’, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations. American Economic Review, 95, 530545.
Plott, C. R. & Zeiler, K. (2007). Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory? American Economic Review, 97, 14491466.
Randall, A. & Stoll, J. R. (1980). Consumer’s Surplus in Commodity Space. American Economic Review, 70, 449455.
Sayman, S. & Onculer, A. (2005). Effects of Study Design Characteristics on the WTP/WTA Disparity: A Meta Analytical Framework. Journal of Economic Psychology, 26, 289312.
Thaler, R. H. (1980). Toward a Positive Theory of Consumer Choice. Journal of Economic Behavior and Organization, 1, 3960.
Tunçel, T. & Hammitt, J. K. (2014). A New Meta-Analysis on the WTP/WTA Disparity. Journal of Environmental Economics and Management, 68, 175187.
US Office of Management and Budget (OMB) (2003). Circular A-4, Regulatory Analysis. Washington, DC: OMB.
Zhao, J. & Kling, C. L. (2004). Willingness to Pay, Compensating Variation, and the Cost of Commitment. Economic Inquiry, 42, 503517.



Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed