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A Compoarison of Dichotomous Choice and Open Ended Contingent Values with Auction Values: A Laboratory Expleriment

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The hypothesis that the authors take from a review of published literature in experimental economics is that dichotomous cholic questions are likely to perform poorly in one shot hypothetical setting and may seriously overestimate values. This prediction is supported by published CV studies comparing open ended to dichotomous choice questions which have shown that values from the later method equal oar exceed those of the former in every case. This is consistent with the hypothesis that dichotomous choice overestimates values. The remainder of the paper presents a series of experiments which test this hypothesis. First, actual bids are obtained in a Vickrey Competitive Auction for an insurance policy protecting the subject against a known probability of a known loss. Second, open ended hypothetical bids are obtained from a different group of subjects for the same commodity. The mean of the open ended hypothetical bids corresponds closely with the the mean of the experienced auction bids. Third, five different groups of subjects, each group facing a different posted price, are asked if they would hypothetically purchase the insurance policy. The resulting demand curve implies that the mean willingness to pay for insurance estimated from the dichotomous choice data substantially exceeds both the mean experienced bid from the auction, and the mean bid form the hypothetical open ended willingness to pay question.

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