Willingness to Pay or Willingness to Accept: Determining the Appropriate Welfare Measure when Preferences are Reference-Dependent

by Jack L. Knetsch and Phumsith Mahasuweerachai

Many recent experimental and field studies have provided strong evidence that people often value losses more substantially than gains. In addition, people also seem to value the changes in both gain and loss domains not as final states (as assumed in standard theory), but in terms of changes from their reference states. Therefore, positive changes may be either gains, which is appropriately measured by willingness to pay (WTP), or reductions of losses, which is appropriately measured by willingness to accept (WTA). Similarly, negative changes may be best measured by the minimum compensation that people require to accept losses, or their willingness to pay for avoiding them. The choice of measures is critically dependent on the reference states of people. This report describes how different values can be derived from using different reference states, and discusses the methodology of defining reference states by using data from a study on the risks of riverbank erosion conducted in the northeast region of Thailand.

  • Publication Year: 2015
  • Country: Thailand
  • Research Area: Water Resources
  • Research Topic: Riverbank Erosion or Sand Mining
  • Analytical Framework: Behavioral/Experimental Economics
Economy and Environment Program for Southeast Asia