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Uncertainty, Risk Aversion, and WTA vs. WTP

Shidler College of Business, University of Hawaii at Manoa, Honolulu, Hawaii 96822
emokada{at}hawaii.edu

We examine a previously unstudied category of exchange items in which the true value is unknown to both the buyer and seller at the time of exchange but becomes known to both at a future time after the exchange. Real-world examples of such exchange items as in our study include forward contracts and fixed-fee turnkey contracts. We demonstrate that the discrepancy between the seller's willingness to accept (WTA) and buyer's willingness to pay (WTP) increases with (1) the level of uncertainty about the exchange item's value and (2) the exchange parties' level of risk aversion. In a series of studies, we manipulate and measure the level of uncertainty of the exchange item, measure the level of risk aversion of the exchange parties, and study the respective effects on decreasing the WTP while increasing the WTA.

Key Words: exchange; valuation; willingness to pay; willingness to accept; buyer; seller; uncertainty; risk aversion
History: Received: June 27, 2007; accepted: November 29, 2008.