Seminar in Microeconomics - Samir Mamadehussene (Católica-Lisbon School of Business and Economics)
The Role of Cognitive Costs in Eliciting Valuations
Tuesday 18 June 2019 (12h15 - 13h30) - Extranef - 109
The Becker-DeGroot-Marschak (BDM) mechanism is frequently used in experimental studies to measure subjects' willingness-to-pay for various products and services. We characterize the optimal report of an agent who is uncertain about his valuation and can incur (cognitive) costs to learn it. We find that the effort that the subject exerts to learn his valuation depends on the distribution of the randomly generated prices. Consequently, we find that the reported valuations depend on the underlying price-distribution of the BDM mechanism. The results are consistent with previous puzzling experimental findings such as Thaler's classic beer-on-the-beach experiment and the experimental result that the willingness-to-accept/willingness-to-pay ratio is larger the less the good is an 'ordinary-market-good'. We test the model's predictions using an experiment, and we find support for our theory that the effort that the agents exert to learn their valuation depends on the underlying price-distribution of the BDM mechanism. The findings support that, contrary to common belief, choosing the price distribution of a BDM mechanism is an important step that should not be taken lightly.