Explaining Hypothetical Bias Variations Using Income Elasticity of Demand

Experimental methods have been widely used to elicit consumer preferences. However, the estimates are challenged because the existing literature indicates that individuals overstate their economic valuation in hypothetical settings, thus giving rise to the so-called “hypothetical bias.” Although many studies seek to experimentally test which factors emphasize or ameliorate the hypothetical bias, no studies analyze its theoretical foundations. Our results also provide empirically testable implications, such as that hypothetical bias increases in a commodity’s income elasticity of demand and budget share.