On the interpretation of the WTP/WTA gap as imprecise utility: an axiomatic analysis

Raphaël Giraud (1, 2)

1 CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190)
2 LED - Laboratoire d'Economie Dionysien

The willingness-to-pay (WTP) and willingness-to-accept (WTA) disparity reported in a rich empirical literature suggests that people have only an imprecise idea of how valuable a good is to them. In this note, we provide axioms that formally relate this imprecision in the evaluation of a good to the imprecision in the utility function, in the sense that x is strictly preferred to y iff the WTP for x is larger than the WTA for y. The preference relation is therefore an interval order (Fishburn (1970)) with ''interval utility' equal to the WTP/WTA interval itself. Applications to preference for liquidity and the strength of the status quo bias are given.

Mots clés: WTA-WTP Gap; Reference-dependent preferences; interval orders; imprecise utility

Domaines: Economies et finances

Raphaël Giraud. On the interpretation of the WTP/WTA gap as imprecise utility: an axiomatic analysis. Economics Bulletin, 2010, 30 (1), pp.692-701. ⟨halshs-00490846⟩