Resolving the WTP-WTA Gap in Changes in Morbidity Risks

In this paper, we examine the gap between the willingness to pay and to accept in changes in morbidity risks. We show that if the decision maker has a reference-dependent preference with the reference point being his status-quo, the willingness to accept will be strictly larger than the willingness to pay for small changes in morbidity risks. This reconciles with what’s usually observed in this literature. The model generates a testable prediction that the more loss averse the decision maker is, the higher is the gap between the willingness to pay and to accept. Moreover, with other things being equal, the willingness to pay (or accept) of an expected utility individual lies between the willingness to accept and the willingness to pay of the decision maker.