De Borger, Bruno and Fosgerau, Mogens (2007): The Tradeoff between money and time: A test of the theory of referencedependent preferences. Forthcoming in: Journal of Urban Economics
There is a more recent version of this item available. 

PDF
MPRA_paper_5734.pdf Download (253kB)  Preview 
Abstract
We formulate a model of referencedependent preferences based on the marginal rate of substitution at the referencepoint of a referencefree utility function. Using binary choices on the tradeoff between money and travel time, referencedependence is captured by value functions that are centered at the reference. The model predicts a directly testable relationship among four commonly used valuation measures (willingness to pay (WTP), willingness to accept (WTA), equivalent gain (EG) and equivalent loss (EL)). Moreover, we show that the model allows recovering the underlying ‘referencefree’ value of time. Based on a large survey data set, we estimate an econometric version of the model, allowing for both observed and unobserved heterogeneity. In a series of tests of high statistical power, we find that the relationship among the four valuation measures conforms to our model and that the constraints on the parameters implied by the model are met. The gap between WTP and WTA is found to be a factor of four. Loss aversion plays an important role in explaining responses; moreover, participants are more loss averse in the time dimension than the cost dimension. We further find evidence of asymmetrically diminishing sensitivity. Finally, we show that the fraction of ´mistakes` (in the sense that participants are observed to sometimes select dominated options), varies systematically in a way consistent with the model of referencedependence. The results of the paper have important implications for the evaluation of infrastructure investment and pricing reforms in the transport sector.
Item Type:  MPRA Paper 

Institution:  Technical University of Denmark 
Original Title:  The Tradeoff between money and time: A test of the theory of referencedependent preferences 
Language:  English 
Keywords:  Referencedependence; loss aversion; WTPWTA gap; value of time 
Subjects:  D  Microeconomics > D0  General > D01  Microeconomic Behavior: Underlying Principles C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C25  Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities 
Item ID:  5734 
Depositing User:  Prof. Mogens Fosgerau 
Date Deposited:  14 Nov 2007 15:01 
Last Modified:  28 Sep 2019 04:54 
References:  Andreoni, J. 1995, "Warmglow versus coldprickle: The effects of positive and negative framing on cooperation in experiments", Quarterly Journal of Economics, vol. 110, pp. 121. Bateman, I., Kahneman, D., Munro, A., Starmer, C., & Sugden, R. 2005, "Testing competing models of loss aversion: an adversarial collaboration", Journal of Public Economics, vol. 89, no. 8, pp. 15611580. Bateman, I., Munro, A., Rhodes, B., Starmer, C., & Sugden, R. 1997, "A Test of the Theory of ReferenceDependent Preferences", The Quarterly Journal of Economics, vol. 112, no. 2, pp. 479505. Bates, J. & Whelan, G. 2001, "Size and sign of Time Savings", ITS Working Paper no. 561. Beesley, M. E. 1965, "The Value of Time Spent in Travelling: Some New Evidence", Economica, vol. 32, no. 126, pp. 174185. Benartzi, S. & Thaler, R. H. 1995, "Myopic Loss Aversion and the Equity Premium Puzzle", Quarterly Journal of Economics, vol. 110, no. 1, pp. 7392. Bernheim, B. D. & Rangel, A. 2007, "Behavioral Public Economics: Welfare and Policy Analysis with Nonstandard DecisionMakers," in Behavioral Economics and Its Applications, P. Diamond & H. Vartiainen, eds., Princeton University Press, pp. 784. Bierlaire, M. 2003, BIOGEME: a free package for the estimation of discrete choice models, Proceedings of the 3rd Swiss Transport Research Conference, Monte Verità, Ascona, Switzerland. Bierlaire, M. 2005, "An introduction to Biogeme", www.epfl.ch/biogeme. Brueckner, J. 2005, "Transport Subsidies, System Choice and Urban Sprawl", Regional Science and Urban Economics, vol. 35, pp. 715733. Calfee, J. & Winston, C. 1998, "The value of automobile travel time: implications for congestion policy", Journal of Public Economics, vol. 69, pp. 83102. Cameron, T. A. & James, M. D. 1987, "Efficient Estimation Methods for "ClosedEnded" Contingent Valuation Surveys", Review of Economics and Statistics, vol. 69, no. 2, pp. 269276. Cantillo, V., Heydecker, B., & de Dios Ortuzar, J. 2006, "A discrete choice model incorporating thresholds for perception in attribute values", Transportation Research Part B: Methodological, vol. 40, no. 9, pp. 807825. Cummings, R. G., Brookshire, D., & Schulze, W. D. 1986, Valuing environmental goods Rowman and Allanheld, Totowa, NJ. De Borger, B. & Proost, S. 2001, Reforming Transport Pricing in the European Union  A Modelling Approach Edward Elgar, Cheltenham, UK. Diamond, P. A. & Hausman, J. A. 1994, "Contingent Valuation: Is Some Number Better than No Number?", Journal of Economic Perspectives, vol. 8, no. 4, pp. 4564. Fosgerau, M. 2006, "Investigating the distribution of the value of travel time savings", Transportation Research Part B: Methodological, vol. 40, no. 8, pp. 688707. Fosgerau, M. 2007, "Using nonparametrics to specify a model to measure the value of travel time", Transportation Research Part A: Policy and Practice, vol. 41, no. 9, pp. 842856. Fosgerau, M. & Bierlaire, M. 2007, "A practical test for the choice of mixing distribution in discrete choice models", Transportation Research Part B: Methodological, vol. 41, no. 7, pp. 784794. Fosgerau, M., Hjort, K., & Vincent LykJensen, S. 2006, The Danish Value of Time Study  Results for Experiment 1 www.dtf.dk. Fosgerau, M. & Nielsen, S. F. 2006, "Deconvoluting preferences and errors: a seminonparametric model for binomial data", Econometric Society European Meeting 2006. Hensher, D. 2001, "The Valuation of Commuter Travel Time Savings for Car Drivers: Evaluating Alternative Model Specifications", Transportation, vol. 28, pp. 101118. Honoré, B. E. & Lewbel, A. 2002, "Semiparametric binary choice panel data models without strictly exogenous regressors", Econometrica, vol. 70, no. 5, pp. 20532063. Horowitz, J. K. & McConnell, K. E. 2003, "Willingness to accept, willingness to pay and the income effect", Journal of Economic Behavior \& Organization, vol. 51, no. 4, pp. 537545. Hultkrantz, L. & Mortazavi, R. 2001, "Anomalies in the Value of TravelTime Changes", Journal of Transport Economics and Policy, vol. 35, no. 2, pp. 285300. Jiang, M. & Morikawa, T. 2004, "Theoretical analysis on the variation of value of travel time savings", Transportation Research Part A: Policy and Practice, vol. 38, no. 8, pp. 551571. Johnson, E. J., Gächter, S., & Herrman, A. 2006, "Exploring the Nature of Loss Aversion", IZA DP, vol. 2015. Kahneman, D., Knetsch, J. L., & Thaler, R. 1990, "Experimental Tests of the Endowment Effect and the Coase Theorem", Journal of Political Economy, vol. 98, no. 6, pp. 13251348. Kahneman, D. & Tversky, A. 1979, "Prospect Theory: An Analysis of Decision under Risk", Econometrica, vol. 47, no. 2, pp. 263292. Kidokoro, Y. 2006, "Benefit estimation of transport projectsa representative consumer approach", Transportation Research Part B: Methodological, vol. 40, no. 7, pp. 521542. Köszegi, B. & Rabin, M. 2006, "A model of referencedependent preferences", The Quarterly Journal of Economics, vol. Forthcoming. List, J. A. 2004, "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace", Econometrica, vol. 72, no. 2, pp. 615625. Munro, A. & Sugden, R. 2003, "On the theory of referencedependent preferences", Journal of Economic Behavior \& Organization, vol. 50, pp. 407428. Pilegaard, N. & Fosgerau, M. 2007, "Costbenefit analysis of a transport improvement in the case of search unemployment", Journal of Transport Economics and Policy, vol. Forthcoming. Plott, C. R. & Zeiler, K. 2005, "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations", The American Economic Review, vol. 95, no. 3, pp. 530545. Randall, A. & Stoll, J. R. 1980, "Consumer's Surplus in Commodity Space", American Economic Review, vol. 70, no. 3, pp. 449455. Small, K. 2005, "Fundamentals of Economic Demand Modeling: Lessons from Travel Demand Analysis," in DecisionBased Design: Making Effective Decisions in Product and Systems Design, forthcoming edn, Kemper Lewis & Linda C.Schmidt, eds., ASME Press. Small, K. A., Winston, C., & Yan, J. 2005, "Uncovering the Distribution of Motorists' Preferences for Travel Time and Reliability", Econometrica, vol. 73, no. 4, pp. 13671382. Stott, H. P. 2006, "Cumulative prospect theory's functional menagerie", Journal of Risk and Uncertainty, vol. 32, no. 2, pp. 101130. Tversky, A. & Kahneman, D. 1991, "Loss Aversion in Riskless Choice: A ReferenceDependent Model", The Quarterly Journal of Economics, vol. 106, no. 4, pp. 10391061. Venables, A. J. 2007, "Evaluating urban transport improvements: costbenefit analysis in the presence of agglomeration and income taxation", Journal of Transport Economics and Policy no. Forthcoming. Wardman, M. 2001, "A review of British evidence on time and service quality valuations", Transportation Research Part E: Logistics and Transportation Review, vol. 37, no. 23, pp. 107128. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/5734 
Available Versions of this Item

Discrete choices and the tradeoff between money and time: A test of the theory of referencedependent preferences. (deposited 08 Jul 2007)

The Tradeoff between money and time: A test of the theory of referencedependent preferences. (deposited 07 Sep 2007)
 The Tradeoff between money and time: A test of the theory of referencedependent preferences. (deposited 14 Nov 2007 15:01) [Currently Displayed]

The Tradeoff between money and time: A test of the theory of referencedependent preferences. (deposited 07 Sep 2007)