Information and the divergence between willingness to accept and willingness to pay

There is considerable empirical and experimental evidence that there is a divergence between willingness to accept compensation to give up a good and willingness to pay to obtain a good. This divergence persists even when the good in question is small relative to income, a result in apparent conflict with standard economic theory. This paper develops a theoretical bidding model with costly information acquisition to explain this divergence. The model generates a gap between offers to sell and bids to buy consistent with the experimental results. We argue that the model does a better job of explaining empirical and experimental data than either of the two commonly invoked theoretical explanations: the endowment effect and the substitution effect. (C) 1999 Academic Press.