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The Divergence Between Willingness-to-Pay and Willingness-to-Accept Measures of Value

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Type: Working Paper
Author: Hoffman, Elizabeth; Spitzer, Matthew L.
Date: 1990
Agency: California Institute of Technology, Division of the Humanities and Social Sciences, Pasadena, CA
Series: Social Science Working Paper, no. 755
URI: http://hdl.handle.net/10535/5742
Sector: Social Organization
Subject(s): economics--models
Abstract: "Do people value commodities more when they own the commodities than when they do not? Although economic models generally presume that economic agents evaluate commodities independently of whether the agents own those commodities or not, an assumption that we term the 'basic independence' assumption, researchers in economics and law are starting to doubt that this is true. These doubts about the soundness of the basic independence assumption challenge accepted economic doctrine. Most theoretical and applied models in economics use the basic independence assumption both to predict and assess the operation of markets. And in the relatively new discipline of law and economics, the basic independence assumption produces the Coase Theorem, which is the starting point for much economic analysis of legal rules. In this paper we present, organize, and critique the modern evidence on the basic independence assumption so as to draw together the learning of the economists and the lawyers. We will first investigate the evidence on the divergence between willingness-to-accept and willingness-to-pay measures of value, and then ask about possible explanations for the evidence. Next, we will explore the implications of the divergence for analysis in law and economics. Last, we will show that although the divergence between willingness-to-accept and willingness-to-pay measures of value may entail substantially limiting the role of cost-benefit analysis, we cannot precisely map those limits without answering some difficult questions about the source of the disparity between willingness-to-accept and willingness-to-pay."

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