Academic journal article Economic Inquiry

Testing Commitment Cost Theory in Choice Experiments

Academic journal article Economic Inquiry

Testing Commitment Cost Theory in Choice Experiments

Article excerpt

I. INTRODUCTION

Consumer willingness to pay (WTP) for private as well as public goods is an important indicator of consumer response to different choice contexts. On the basis of the Hicksian welfare theory, the WTP can be interpreted as the compensating variation (CV) assuming that individuals' choice decisions regarding the value of a good are made in certainty and under static conditions (Mitchell and Carson 1989; Smith 2000; Zhao and Kling 2004). However, in real purchasing situations, individuals might be uncertain about the utility they can derive from a good or service.

Uncertainty in decision making is a crucial aspect in various economic settings (e.g., financial investment and environmental policy) in which agents generally make choice decisions without knowing their effects on future rewards (Arrow and Fisher 1974; Dixit 1992; Dixit and Pindyck 1994; Fisher 2000). In addition, individuals' uncertainty about the product may be a key factor in the adoption of new or novel products (Castano et al. 2008; Hoeffler 2003). Moreover, consumers' uncertainty about the value of the good has often been associated with the degree of availability of product information. In this regard, several studies have documented that, depending on the kind of information (positive or negative), individuals' WTP for a good or service can increase or decrease when the information is provided, especially in cases when individuals are not familiar with the good in question (Bower, Saadat, and Whitten 2003; Corrigan et al. 2009; Depositario et al. 2009; Hoehn and Randall 2002; Lusk et al. 2004; Marette et al. 2008; Meenakshi et al. 2012; Nayga, Aiew, and Nichols 2005; Protiere et al. 2004; Tkac 1998).

However, in real purchase or choice situations, consumers may not be able to acquire information at the moment of purchase. As such, when uncertainty exists regarding the features of a good, they either take a risk and purchase the product immediately or delay the purchase until they obtain more knowledge about the product's quality. Furthermore, individuals might have the opportunity to consider the purchase and return the product later if they are uncertain, among others, about whether its use is beneficial. Hence, in contrast with assumptions of neoclassical theory, in real choice settings, choices are typically made in a relatively dynamic context, in which individuals have the option to delay the transaction when future information can be gathered and to return the product in case they are uncomfortable with their purchase (Corrigan 2005; Corrigan, Kling, and Zhao 2008 ; Kling, List, and Zhao 2013 ; Lusk 2003; Zhao and Kling 2004).

Individuals' decision making in dynamic settings has been significantly investigated in environmental economics and finance (Arrow and Fisher 1974; Dixit 1992; Dixit and Pindyck 1994). However, consumers' choice behavior in a dynamic context is still a scarcely explored issue in the literature. Zhao and Kling (2001, 2004) re-examined, for the first time, the quasi-option value (QOV) concept to explain consumers' WTP formation, (1) demonstrating that theoretical divergence exists between static and dynamic welfare measures. The authors assume that in real choice situations, consumers' WTP not only depends on the intrinsic value of the good but also on a variety of factors such as the level of uncertainty about the good, the timing of decision making, and the degree of reversibility of a transaction (Zhao and Kling 2001, 2004). Hence, committing to a decision at the moment of the transaction may represent a cost for the individual. This cost has been termed by Zhao and Kling (2001, 2004) as the "commitment cost" (CC), that is, the "cost of forgoing the opportunity to learn more about the value of a good if a purchase is made today" (Lusk and Shogren 2007, 43). Theoretically, CC represents the difference between consumers' WTP and the static Hicksian CV when (1) individuals have uncertainty about the value of a good, (2) there is the possibility of delaying a purchase and gathering future information, and (3) the degree of irreversibility of a decision varies (Lusk 2003; Zhao and Kling 2004). …

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