Gap between Willingness-to-Pay (WTP) and Willingness-to-Accept (WTA) Measures of Value of Travel Time: Evidence from Norway and Sweden
Abstract:A main purpose of this paper is to stress the existence of the gap between willingness-to-pay (WTP) and willingness-to-accept (WTA) measures of value of time that is larger than could be explained in a Hicksian framework. The explanation of the gap is of great importance in welfare analysis. This is a subject that has not been paid much attention to in value-of-time studies and there is great need for further research on the subject. This paper relies on the evidence from Norwegian and Swedish value-of-time studies to examine the gap between WTP and WTA measures of value of time. These studies use different techniques for data collection. The evidence from both studies suggests that the observed WTA measure of value of time is about 1.5-2.0 times larger than WTP measure. Alternative model formulations in the Swedish study to address 'inertia factors' for WTP and WTA, or the exclusion of zero values for WTP and WTA measures in the Norwegian study, reduce the gaps. The reductions of the observed gaps in the WTP and WTA measures are analysed in the framework suggested by Zhao and Kling in 2001. They put forward 'commitment cost' as an explanation for WTP and WTA gap. An agent forms a commitment cost, in a similar manner to a 'real option', due to a lack of information, knowledge and uncertainty about his own valuations and also because a decision about a transaction has to be made rather swiftly. The theoretical framework suggested by Zhao and Kling is in line with additive utility functions underpinning the neo-classical economics. If indeed 'commitment costs' is the explanation for the observed WTP and WTA gaps, the observed small values of small time savings should be interpreted as short-term valuations. The long-term values of small time savings should be quite higher than the short-term values.
Document Type: Research Article
Publication date: September 1, 2007