ANALYSIS
Moral dimensions of the WTA – WTP disparity: an
experimental examination
Johan Anderson *, Dan Vadnjal, Hans-Erik Uhlin
Department of Economics,Swedish Uni6ersity of Agricultural Sciences,PO Box7013,S-750 07Uppsala,Sweden Received 15 December 1998; received in revised form 23 March 1999; accepted 22 June 1999
Abstract
Contrary to welfare economic theory, empirical evidence suggests that the amount of money people are willing-to-accept (WTA) to forego a commodity will generally exceed the amount of money they are willing-to-pay (WTP) to gain the commodity. This paper undertakes an experimental examination of the WTA-WTP disparity using conventional and ecologically produced eggs. The results of this experiment reveal that the difference between the mean WTP and WTA for conventional eggs is negligible while the mean WTA is more than 1.5 times higher than the mean WTP in the case of ecological eggs. An explanation for this result is offered following the Boyce et al. (Boyce, R.B., Brown, T.C., McClelland, G.H., Peterson, G.L., Schulze, W.D., 1992. An experimental examination of intrinsic values as a source of the WTA-WTP disparity. Am. Econ. Rev. 82, 1366 – 1373) notion that an asymmetrical assignment of moral responsibility may cause WTA to exceed WTP. By comparing the two studies, a tentative conclusion is that the valuation disparity is likely to increase with a corresponding increase in the degree of assigned moral responsibility. © 2000 Elsevier Science B.V. All rights reserved.
Keywords:Valuation; Property rights; Moral responsibility; Ecological eggs
www.elsevier.com/locate/ecolecon
1. Introduction
A general and widely accepted assumption in welfare economic theory is that there will be zero or negligible differences between willingness-to-pay (WTP) and willingness-to-accept (WTA) measures when income effects are small or zero (Randall and Stoll, 1980; Freeman, 1993). However, empirical
evidence of contingent valuation studies suggests that the price at which people are willing to sell environmental goods is significantly higher (rang-ing between factors of 2 and 16) than the price at which they are willing to buy these same goods (see Kahneman et al., 1990). This has raised questions over the likely causes of the valuation disparity between WTP and WTA measures.
Several explanations have been offered, based on experimental examinations of the valuation
* Corresponding author.
disparity. Kahneman et al. (1991) postulate the endowment effect as a manifestation of an asym-metry in value which Kahneman and Tversky (1984) refer to as loss aversion. They argue that losses are being weighted substantially more than gains, and consequently, people will often demand more compensation to forego a good in their possession than they will be willing to pay to gain the same good. Following the work of Hanemann (1991), Shogren et al. (1994) offers a further ex-planation. They argue that the valuation disparity relates to a substitution effect. That is, a disparity occurs when a good has imperfect substitutes, and the divergence between WTP and WTA expands as the degree of substitution decreases. A further and much less explored explanation for the valua-tion disparity is offered by Boyce et al. (1992). They argue that the valuation disparity relates to intrinsic values.
In an experiment designed to investigate the hypothesis that the introduction of intrinsic values will create or increase the valuation disparity, Boyce et al. compared four conditions. In the first set of conditions respondents were asked their WTP to purchase a small Norfolk pine tree which they could obtain for use as a house plant, or given a tree and asked their WTA to sell the tree back to the experimenter. To add intrinsic value to preserving the life of the tree, two analogous conditions were introduced in which the tree would be killed if respondents either failed to purchase the tree, or sold the tree back to the experimenter. In the experiment, they found that WTA generally exceeded WTP for both the kill and no-kill conditions, but that the kill condition exacerbated the disparity between WTP and WTA.
Boyce et al. offer an explanation for the WTP – WTA disparity in the kill scenario by equating moral responsibility with intrinsic value. They argue that the assignment of property rights shifts the allocation of moral responsibility for preserv-ing the tree. Thus, intrinsic values are deemed to be included in WTA measures because the sellers hold the property rights and view themselves as being responsible for the death of the tree. They are partially excluded from WTP measures, how-ever, because the buyers do not hold the property
rights and they may view the responsibility as resting at least partially in the hands of the experimenter.
In this paper we present an experiment that tests for the valuation disparity, using convention-ally produced eggs, and in some treatments, using non-conventional (referred to hereafter as ecologi-cal) eggs and informing participants in the experi-ment that these were derived from an animal and environmentally ‘friendly’ production process. Thus, the experiment is similar to the Boyce et al. study in that we add a moral dimension to some of the treatments. Our experiment, however, has been designed to observe whether people place a monetary value, not only on the consumption of eggs, but also, on the welfare of hens producing ecological eggs and on the environment. Thus, it is our contention that it is the assignment of moral responsibility associated with an assign-ment of property rights, giving rise to expressions of intrinsic value, that explains the valuation disparity.
2. The experiment — a theoretical background
In both sets of conditions, the property rights implied by the WTP and WTA measures were clearly assigned to either the experimenter or the participants. That is, participants were assigned rights to the eggs in the WTA conditions, while in the case of those asked to submit an offer in the WTP conditions, they were assigned no rights to the eggs. The relationship between WTP and WTA measures and property rights has been thoroughly discussed in the context of contingent valuation (Mitchell and Carson, 1989; Schmid, 1995; Vadnjal, 1995; Vatn and Bromley, 1995) and environmental economics more generally (Randall, 1987; Freeman, 1993). However, the idea that there is a moral responsibility compo-nent associated with the assignment of property rights appears to have received much less atten-tion in the literature.
Boyce et al. explains the relationship between property rights and moral responsibility, suggest-ing the assignment of property-rights may affect the participants’ perception of the allocation of moral responsibility. We interpret the ecological egg conditions in a similar way to that of Boyce et al. In the WTP condition, moral responsibility for the welfare of the hens may be viewed by partici-pants as resting partially in the hands of the experimenter, and in the WTA condition, moral responsibility for the welfare of the hens and the environment, may be viewed by participants as resting with themselves. However, there are sev-eral notable similarities and differences between the experimental setting of the Boyce et al. study and our study.
One difference relates to the informational con-text in which the two experiments are set. In the Boyce et al. study, in the WTA condition at least, there was a clear and strong allocation of moral responsibility, in that participants could avoid the tree being killed by not allowing the tree to be sold. In our study, however, the allocation of moral responsibility is less clear and weaker, in as far as respondents are not capable of directly influencing the welfare of ecological egg-produc-ing hens or the environment. In other words, the participants’ perceptions of the allocation of moral responsibility relates to the welfare of these hens and the environment rather than the
ecologi-cal eggs themselves. Thus, there is arguably an indirect and possibly weaker allocation of moral responsibility in our experiment compared with the Boyce et al. study.
Secondly, while we stressed the animal welfare aspect associated with the production of ecologi-cal eggs, it is recognised that participants might also attach intrinsic value to more general and associated environmental improvements.
Thirdly, Boyce et al. acknowledge that there may be an element of moral responsibility in the WTA-no kill condition as long as participants feel that they would be able to take better care of the tree than the experimenter were they to sell the tree. Thus, they suggest that some of the moral responsibility argument may apply to the treat-ments in which the trees are not killed. In our experiment, however, the allocation of moral re-sponsibility relates to the welfare aspects of eco-logical-egg production. There would, therefore, seem to be little likelihood of participants feeling any degree of moral responsibility in the WTA condition for the welfare aspects of conventional egg production.
participants attach, not to the consumption of the eggs, but to knowing or believing they are indi-rectly influencing or supporting ecological-egg production.
Fifthly, while Boyce et al. use an extraordinary (comprising the killing of a tree), ours is a normal good.
Finally, following Boyce et al., our suggestion that the valuation disparity has moral dimensions is intended to supplement rather than replace Kahneman et al. (1991) notion of an endowment effect. That is, in both the conventional and eco-logical egg conditions, loss aversion may result in participants demanding more compensation to forego their eggs compared with the amount of money they are willing to pay to gain the eggs. But it is the assignment of moral responsibility in the ecological egg conditions that may lead to an increase in the disparity between WTP and WTA. Thus, with these comments in mind, it is our contention that the assignment of moral responsi-bility in the ecological egg (E) conditions (WTA-E and WTP-E) will cause a larger disparity between WTP and WTA as compared with the conven-tional egg (C) conditions (WTA-C and WTP-C).
3. The experiment
3.1. Experimental design
A total of 76 students from the Swedish Uni-versity of Agricultural Sciences and the UniUni-versity College of Ga¨vle agreed to participate in this experiment. Students came from classes of busi-ness administration, economics and chemistry.
The use of student samples is nowadays a com-mon practice in experimental economics. Evidence to date suggests that the behaviour of students does not differ markedly from the behaviour of decision-makers recruited in naturally occurring markets (see Smith et al., 1988; Dyer et al., 1989). In the context of our experiment students are also relevant decision-makers as the majority are self-catering and egg consumers. However, the atti-tudes of students may differ from those of the general population. For instance, students may be more environmentally as well as animal welfare
conscious. This may have affected the extent of the valuation disparity in the ecological egg conditions.
In choosing the commodity to be used in this experiment we decided that the commodity should comprise some element of intrinsic value. We have already noted the definitional confusion that sur-rounds notions of intrinsic value. In the context of our experiment, intrinsic value refers to the value participants attach to the welfare of ecological egg-producing hens as well as the quality of the environment. In order to gauge whether partici-pants attached intrinsic value to the process of enhancing the welfare of ecological egg-producing hens, or more general environmental improve-ments, they were asked to respond to follow-up questions concerning factors motivating their re-sponse. The follow-up questions are described in the following section. In the experiment, partici-pants in the ecological egg conditions were in-formed that hens producing these eggs are housed in floor systems with a maximum of seven hens per square metre (indoors during the winter months and outdoors during the summer months) and fed fodder produced using no artificial fer-tilisers or pesticides (KRAV, 1997). The ecologi-cal egg production system is deemed to be superior, from an animal welfare point of view, as this system allows the animals to perform addi-tional natural behaviour patterns. Moreover, the fact that the animals can move freely strengthens their skeletons and muscles (Jordbruksverket, 1996). Apart from the welfare of the hens, how-ever, participants were also informed that the use of no artificial fertilisers or pesticides is consistent with the long-term sustainability of the agricul-tural ecosystem. Participants were also informed about some of the main advantages and disadvan-tages of ecological egg production.
The experiment was run as an auction and was implemented in four separate conditions, two in which participants were either buying or selling conventional eggs and two in which participants were either buying or selling ecological eggs.
conventional egg conditions, we test two hypothe-ses. These are summarised below.
H0: WTA-C=WTP-C
H1: WTA-C\WTP-C
H0: WTA-E=WTP-E
H1: WTA-E\WTP-E
3.2. Method
The chosen auction mechanism used in our experiment was the multiple-unit Vickrey (Vick-rey, 1961) auction (MUVA). The Vickrey auction mechanism has been the preferred auction mecha-nism in a number of real exchange experiments (Shogren et al., 1994; Menkhaus et al., 1992). The MUVA is a theoretically incentive compatible auction mechanism. In the experiment, three half-dozen cartons of eggs each were auctioned off at the fourth highest price. A fourth price auction was used instead of a second price auction as it was deemed necessary to auction off more than one package of eggs to ensure the interests of the participants was maintained throughout the auc-tion. The incentive compatibility property of the auction implies that there are no incentives to bid higher or lower than a bidder’s true valuation of the commodity. If bidders state a higher bid than their true valuation of the commodity, they risk purchasing the object for a higher price than their true valuation of the commodity. Similarly, if they state a lower price than their true valuation of the commodity, they run the risk of losing the auction at a price which is less than their true valuation of the commodity. The incentive compatibility of the MUVA was explained in the instructions, both theoretically as well as by a numerical example. Although incentive compatible, the Vickrey auc-tion mechanism may sometimes induce instances of competitive bidding (Cox et al., 1985). How-ever, researchers are divided on the issue of how serious a problem over bidding is (see Kagel et al., 1987) for a view de-emphasising the importance of overbidding).
The experiments were conducted in classrooms and participants took part in only one session. Before the instructions were handed out
partici-pants were asked to obey the same rules as for an exam; that is, they were told not to speak to anyone or to pass on any notes, and so forth. They were also asked to raise their hands if they had any questions.
Table 1
Experimental results
N S.D.
Mean
Conditions Ratio
WTA-C 16.8 14.11 18
14.6 10.39
WTP-C 19 1.15
21.0 11.83 19
WTA-E
18 1.59
WTP-E 13.2 6.48
importantly, however, the disparity between WTP and WTA in the ecological egg conditions is exacerbated compared with the disparity between the two measures in the conventional egg conditions.
The results of a one-tailed Mann – Whitney U -test are presented in Table 2.1 In the ecological
egg conditions the difference between the mean WTP and WTA is significant at thePB0.05 level.
In comparison, however, the difference between the mean WTP and WTA in the conventional conditions is not statistically significant at the
PB0.05 level. In other words, at the PB0.05
level we reject the null hypothesis that WTA-E=
WTP-E and accept the null hypothesis that WTA-C=WTP-C. Thus, these results provide support for our contention that the assignment of moral responsibility causes a larger disparity between WTP and WTA as compared with the conven-tional egg conditions.
Moreover, our suggestion in Section 2 that the assignment of moral responsibility gives rise to expressions of intrinsic value in the ecological egg conditions is supported by the comments made by participants when asked to rank in order of im-portance the three most important factors that had motivated their bids or offers. In both the WTP and WTA conditions, participants indicated a combination of motivational factors. That is, participants stated that their bids or offers were motivated by the well-being of the hens, animal care aspects or the knowledge that free-range hens were better off. They were also motivated, albeit less frequently, by more general concerns, such as the knowledge that fodder produced without pes-ticides would be better for long-term agricultural sustainability, positive impacts on the environ-ment and ecologically sound production.2
The auction was run as a one-shot auction, that is, there was only one trial and it was binding. In an experiment designed to test for the difference between WTP and WTA Shogren et al. (1994) used a repeated bid auction and found conver-gence between the two measures. However, in the Shogren et al. experiment, bids were posted after each trial, which may have influenced the conver-gence. As Harrison (1995) points out, repetition of the Vickrey auction may result in a revision of what subjects perceive the price of field substitutes to be and in so far as this affects the participants bidding, the repetition of the Vickrey auction will influence the distribution of the observed bids.
Upon completion of the MUVA exercise, but prior to posting the winning bids, participants were presented with follow-up questions concern-ing factors motivatconcern-ing their response. They were asked to list, and to rank in order of importance, the three most important factors that had moti-vated their bids or offers in the auction. These follow-up questions were presented to participants in all four conditions.
4. Results
The experimental results are summarised in Table 1. In both the conventional egg conditions and the ecological egg conditions the mean WTA values clearly exceed the mean WTP values. Most
1The Mann-Whitney U-test is a non-parametric test. This
was used because distributions in all groups except WTP-E were skewed. Furthermore, bids in the WTP-E group were bimodal.
2Approximately 60% of the subjects in the ecological egg
conditions stated either animal welfare or environmental con-cerns, or a combination of the two, as the two most important factors influencing their bids. The equivalent figure for the three most important factors is almost 80%.
Table 2
Mann–WhitneyU-test
Hypothesis z p
0.2676 0.62
WTA-C\WTP-C
0.0228 2.01
The inclusion of follow-up questions also en-abled us to detect possible instances of what Bohm (1972) refers to as auction fever. In our experiment, we defined auction fever as occur-ring where participants made bids or offers that were primarily motivated by a desire to be the winning bidder rather than by the value to them of the commodity in question. In one case, in the WTP-C condition, a participant bid 50 SEK and stated in the follow-up questions that the most important factor influencing the bid was to win the auction. Thus there is reason to believe that this bid was not a true measure of the value of the eggs to the participant and the bid was excluded from the statistical analysis. We also excluded a bid of 105 SEK in the WTA-C condition. This bid was classified as an extreme value in a box-plot analysis (i.e. the bid was more than three box lengths from the 75th per-centile).
5. Conclusions
The results presented in this paper would ap-pear to confirm the findings of the Boyce et al. study. There are, however, several important features of our study that we believe offer fur-ther clarification on the moral dimensions of the disparity between WTP and WTA measures. First of all, we sought to explicitly avoid the vagueness associated with the term intrinsic value, by defining it as the value participants attach to the welfare of ecological egg-producing hens and the environment. In the follow-up questions, participants clearly stated that their bids or offers in the ecological egg conditions were motivated by their concern for the welfare of the hens. However, they also expressed their concerns for the welfare of the environment in general. Thus, in our study, it seems reasonable to conclude that the disparity between WTP and WTA has been largely due to the intrinsic value related to a combination of animal welfare and environmental sustainability concerns.
Secondly, in the Boyce et al. study, the ratio of means in the no kill conditions is 1.66 and 2.36, in the WTP and WTA kill conditions,
re-spectively. In our study, the ratio of means are 1.15 and 1.59 for the conventional egg and eco-logical eggs conditions, respectively. That there is larger difference between the ratio of means in the Boyce et al. study (0.70) compared with our study (0.44) may have something to do with our earlier suggestion that our experimental de-sign produces a comparably weaker allocation or moral responsibility. Thus, it may be useful to think in terms of degrees of moral responsi-bility. That is, it may be the case that the valua-tion disparity actually increases with a corresponding increase in the degree of assigned moral responsibility. The moral responsibility as-sociated with knowing the tree will be killed if participants choose not to buy or sell the tree, in other words, is greater or more significant than the situation in which participants are buy-ing and sellbuy-ing ecological eggs.
Finally, Schmid (1995) has pointed out that no contingent valuation study can escape the property rights question of whether to measure WTP or WTA. However, to the extent that the assignment of property rights affects peoples’ perceptions of the allocation of moral responsi-bility, it would seem necessary that consider-ation also be given to the moral dimensions of WTP and WTA measures. The results presented in this paper give support to criticism of the current practice of generally recommending WTP measures in contingent valuation (Free-man, 1993). Such a practice is in some cases likely to produce valuations that are seriously biased and which thus undermine the policy as-sessments upon which they are based.
Acknowledgements
Appendix A
A.1. Instructions (translated from Swedish)3
A.1.1. Introduction
The objective of organic farming is to keep long-term sustainable production of food and other products in a system based on local and renewable resources where plant cultivation and animal husbandry is well integrated. This requires that a major part of the fodder shall be organi-cally grown and grown on the home farm. KRAV rules governing egg production demands that the needs of the hens are fulfilled and that they are able to perform their specific behaviour patterns. The rules also state that hens shall have access to sand-baths, perches and laying places to such an extent that the animals can use these freely. The amount of room is also regulated and the regula-tions state that there should be no more than seven hens per square metre of floor. Moreover, these pastoral areas shall be covered so as to ensure adequate fodder and plentiful opportunity for occupation.
However, ecological egg production is not with-out its problems. Commercial laying hens are the result of breeding for high egg production in cages for more than 40 years. They have thus become adjusted to a cage environment, and as a conse-quence, their familiarity with the natural environ-ment has deteriorated. The main disadvantage of cages is that hens have limited room for move-ment and that they cannot sand-bath nor lay eggs in laying places. The advantage is that production is safe and that feather plucking and cannibalism is limited to single cages.
The advantages of ecological egg production are:
that hens can perform their natural behaviour
patterns such as laying eggs places, sitting on perches, scratching and sand-bathing;
that hens have a large freedom of movement
which strengthens their skeletons and muscles;
the fodder that is provided to the hens is
organically farmed, that is, it does not contain artificial fertilisers and pesticides, which con-tributes to the keeping and strengthening of the long-term production capacity of land and the rest of the agricultural ecosystem.
The disadvantages of the ecological production are:
a high share of the eggs are not laid in the
laying place;
high sensitivity of deficiencies in the
composi-tion of the fodder;
problems with cannibalism and feather
plucking;
widely varying production results between
dif-ferent rounds.
A.1.2. Instructions for the auction
In this experiment we will create a market in which you will be given the opportunity to buy a single half-dozen carton of ecological eggs. Three cartons of the eggs will be sold in the auction and each participant will be given the opportunity to buy one carton each. The auction will be run as a quiet auction. That is, all bids will be written down and will not be revealed to any other partic-ipant. All bids will be treated with confidentiality.
A.1.3. How are the buyers determined?
The three eventual buyers will be determined by those individuals who state the three highest bids. The price which the buyers eventually pay will be equal to the fourth highest bid. Before we start the experiment we will discuss different bidding strategies. It is important that you understand which is the best strategy for you.
Let us assume you have decided you are willing to pay 100 SEK for the good. Let us call this your true valuation of the good. What then will be your best strategy: to bid higher than 100 SEK, lower than 100 SEK or to bid exactly 100 SEK? The answer is: bid exactly 100 SEK. If you bid less than 100 SEK (e.g. 50 SEK) the auction may be won by the three highest bids (e.g. 70, 80, and 90 SEK), and you be able to buy the good although you were actually prepared to pay more than the fourth highest bid of 60 SEK. To bid less than your true valuation, therefore, is not a good strategy.
3The following instruction are for the WTP ecological egg
If you bid more than 100 SEK (e.g. 130 SEK) you can win the auction and be forced to pay more than your true valuation (e.g. the fourth highest bid is 110 SEK). To bid more than your true valuation, therefore, is not a good strategy.
Let us go through a numerical example:
Bidder True value (SEK) Bid (SEK) ?
100 1
90
2 90
80 80
3
4 70 70
60 60
5
50
6 50
7 40 40
You are bidder 1. This is a situation where you will win the auction if you bid your true valua-tion. Is there any reason for you to bid lower? No. If you, for example, underbid at 95 SEK this will not affect your buying price as you will pay the fourth highest bid equal to 70 SEK in any case. By underbidding at 95 SEK you will risk losing the auction if it is the case that, for exam-ple, bidders 2, 3 and 4 overbid at 97, 105 and 110 SEK. If bidders 2, 3 and 4 underbid at 85, 75 and 65 SEK you will pay 65 SEK irrespective of whether you have underbid at 95 SEK or if you have stated a bid of 100 SEK which is your true valuation. There is, therefore, no reason for you to underbid irrespective of what the others bid. The reason for this is that you cannot affect the price you are going to pay. Can you affect your situation by exaggerating your true valuation? No. If bidder 2, 3 and 4 overbid at 110, 120 and 130 SEK, respectively and you have bid more than 110 SEK, then you will win the auction but will have to pay 110 SEK which is more than your true valuation. If bidders 2, 3 and 4 overbid at 95, 85 and 75 SEK you will still win with a bid of 100 SEK. If bidders 2, 3 and 4 underbid at 85, 75 and 65 SEK, a 100 SEK bid from you will still win. There is therefore no reason for you to over bid, independent of what the others bid.
The best strategy in this type of auction is to always bid the most you are prepared to pay. You will not risk paying more for the good than you are prepared to, and you will never have to pay
more than the fourth highest bid. And why risk unnecessarily losing the auction by stating an underbid?
A.1.4. How the auction works
Remember that this auction is a quiet auction. All bids are written down and will not be revealed to any participant in the auction.
Everybody in this room participates in the auc-tion. Please do not show or discuss your bid with anybody else.
You will soon be asked to write down your bid on the form provided.
Once you have written your bid on the form, raise your hand and an assistant will come and collect the form.
After all bids have been collected, the winners will be determined. The winners are the three individuals who have stated the three highest bids. Also the fourth highest bid will be determined and announced. It will not, however, be announced which participant stated this bid.
All winners of the auction will be identified by the numbers they have been given.
The buyers pay the fourth highest bid. The money is paid to the experimental leader after the end of the experiment. The winners are given the eggs after having paid for them.
We want to know the value of the eggs to you. Only the winners in the auction described above will be able to buy the ecologically produced eggs. They are the ones with the three highest bids and they will pay the fourth highest bid.
Please fill in the bid you wish to state. If you do not wish to state a bid, write a ‘0’ below.
Remember it is in your interest to state truth-fully what you are prepared to pay for the ecolog-ically produced eggs.
I am prepared to pay – – – – – –SEK here and now.
After stating your bid please raise your hand.
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