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Willingness to Pay, Willingness to Accept and “Smooth vs Kinked” Utility of Wealth Functions: An Empirical Test of a Theoretical Debate

Lookup NU author(s): Professor Susan Chilton, Emeritus Professor Michael Jones-Lee, Rebecca McDonald, Dr Hugh Metcalf

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Abstract

We obtain ‘Willingness to Accept/Willingness to Pay’ (WTA/WTP) ratios 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 differ significantly from unity, in accordance with standard theory. On the basis of this evidence, we find no compelling evidence to reject the neoclassical assumption of ‘smooth’ utility of wealth functions which underlies standard Value of a Prevented (Statistical) Fatality (VPF) analysis.


Publication metadata

Author(s): Chilton S, Jones-Lee M, McDonald R, Metcalf H

Publication type: Report

Publication status: Published

Series Title: Newcastle Discussion Papers in Economics

Year: 2010

Pages: 23

Report Number: 2010-6

Institution: Newcastle University Business School

Place Published: Newcastle upon Tyne, UK

URL: http://www.ncl.ac.uk/nubs/assets/documents/workingpapers/economics/WP06-2010.pdf

Notes: Submitted to Journal of Risk and Uncertainty ISSN: 1361-1837


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