The WTP-WTA Gap for Public Goods: New Insights from Compensating and Equivalent Variation Closed-Form Solutions

Abstract: This study finds exact closed-form solutions for compensating variation (CV) and equivalent variation (EV) for both marginal and non-marginal changes in public goods given homothetic utility. The parameters for these solutions are recoverable from observable data in empirical applications as a single sufficient statistic summarizes consumer preferences. The closed-form CV and EV expressions identify three economic mechanisms that determine the magnitudes of CV and EV. One of these mechanisms, the relative preference effect, helps explain the disparity between willingness to pay (WTP) and willingness to accept (WTA) for public goods.