Does the WTA/WTP Ratio Diminish as the Severity of a Health Complaint is Reduced? Testing for Smoothness of the Underlying Utility of Wealth Function

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  2. Professor Susan Chilton
  3. Professor Michael Jones-Lee
  4. Rebecca McDonald
  5. Dr Hugh Metcalf
Author(s)Chilton S, Jones-Lee M, McDonald R, Metcalf H
Publication type Article
JournalJournal of Risk and Uncertainty
Year2012
Volume45
Issue1
Pages1-24
ISSN (print)0895-5646
ISSN (electronic)1573-0476
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The aim of the study reported in this paper is to test the hypothesis that individual utility of wealth functions may violate the assumption of smoothness that underpins the standard analysis of the Value of Statistical Life (VSL) and safety. In order to do so we examine the way in which the Willingness to Accept/Willingness to Pay (WTA/WTP) ratio varies as the severity of a health complaint is reduced. This was carried out for two health complaints using a stated-preference study which was preceded by a WTA-WTP learning experiment that employed an incentive-compatible disclosure method. We find that while, not surprisingly, for more serious health effects WTA responses tend to be substantially larger than their WTP counterparts , it is nonetheless the case that as the severity of the health effect is reduced, the WTA/WTP ratio converges across the sample and tends to a level that does not significantly exceed unity. While we acknowledge that this does not constitute conclusive evidence of smoothness, it does suggest that the case in favour of the assumption that individual utility of wealth functions tend to display a kink at the current level of wealth is less than wholly persuasive.
PublisherSpringer
URLhttp://dx.doi.org/10.1007/s11166-012-9145-5
DOI10.1007/s11166-012-9145-5
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