Moral dimensions of the WTA–WTP disparity: an experimental examination

Ecological Economics 32 (2000) 153 – 162 www.elsevier.com/locate/ecolecon

ANALYSIS

Moral dimensions of the WTA–WTP disparity: an experimental examination Johan Anderson *, Dan Vadnjal, Hans-Erik Uhlin Department of Economics, Swedish Uni6ersity of Agricultural Sciences, PO Box 7013, S-750 07 Uppsala, Sweden Received 15 December 1998; received in revised form 23 March 1999; accepted 22 June 1999

Abstract Contrary to welfare economic theory, empirical evidence suggests that the amount of money people are willing-to-accept (WTA) to forego a commodity will generally exceed the amount of money they are willing-to-pay (WTP) to gain the commodity. This paper undertakes an experimental examination of the WTA-WTP disparity using conventional and ecologically produced eggs. The results of this experiment reveal that the difference between the mean WTP and WTA for conventional eggs is negligible while the mean WTA is more than 1.5 times higher than the mean WTP in the case of ecological eggs. An explanation for this result is offered following the Boyce et al. (Boyce, R.B., Brown, T.C., McClelland, G.H., Peterson, G.L., Schulze, W.D., 1992. An experimental examination of intrinsic values as a source of the WTA-WTP disparity. Am. Econ. Rev. 82, 1366 – 1373) notion that an asymmetrical assignment of moral responsibility may cause WTA to exceed WTP. By comparing the two studies, a tentative conclusion is that the valuation disparity is likely to increase with a corresponding increase in the degree of assigned moral responsibility. © 2000 Elsevier Science B.V. All rights reserved. Keywords: Valuation; Property rights; Moral responsibility; Ecological eggs

1. Introduction A general and widely accepted assumption in welfare economic theory is that there will be zero or negligible differences between willingness-to-pay (WTP) and willingness-to-accept (WTA) measures when income effects are small or zero (Randall and Stoll, 1980; Freeman, 1993). However, empirical * Corresponding author.

evidence of contingent valuation studies suggests that the price at which people are willing to sell environmental goods is significantly higher (ranging between factors of 2 and 16) than the price at which they are willing to buy these same goods (see Kahneman et al., 1990). This has raised questions over the likely causes of the valuation disparity between WTP and WTA measures. Several explanations have been offered, based on experimental examinations of the valuation

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disparity. Kahneman et al. (1991) postulate the endowment effect as a manifestation of an asymmetry in value which Kahneman and Tversky (1984) refer to as loss aversion. They argue that losses are being weighted substantially more than gains, and consequently, people will often demand more compensation to forego a good in their possession than they will be willing to pay to gain the same good. Following the work of Hanemann (1991), Shogren et al. (1994) offers a further explanation. They argue that the valuation disparity relates to a substitution effect. That is, a disparity occurs when a good has imperfect substitutes, and the divergence between WTP and WTA expands as the degree of substitution decreases. A further and much less explored explanation for the valuation disparity is offered by Boyce et al. (1992). They argue that the valuation disparity relates to intrinsic values. In an experiment designed to investigate the hypothesis that the introduction of intrinsic values will create or increase the valuation disparity, Boyce et al. compared four conditions. In the first set of conditions respondents were asked their WTP to purchase a small Norfolk pine tree which they could obtain for use as a house plant, or given a tree and asked their WTA to sell the tree back to the experimenter. To add intrinsic value to preserving the life of the tree, two analogous conditions were introduced in which the tree would be killed if respondents either failed to purchase the tree, or sold the tree back to the experimenter. In the experiment, they found that WTA generally exceeded WTP for both the kill and no-kill conditions, but that the kill condition exacerbated the disparity between WTP and WTA. Boyce et al. offer an explanation for the WTP – WTA disparity in the kill scenario by equating moral responsibility with intrinsic value. They argue that the assignment of property rights shifts the allocation of moral responsibility for preserving the tree. Thus, intrinsic values are deemed to be included in WTA measures because the sellers hold the property rights and view themselves as being responsible for the death of the tree. They are partially excluded from WTP measures, however, because the buyers do not hold the property

rights and they may view the responsibility as resting at least partially in the hands of the experimenter. In this paper we present an experiment that tests for the valuation disparity, using conventionally produced eggs, and in some treatments, using non-conventional (referred to hereafter as ecological) eggs and informing participants in the experiment that these were derived from an animal and environmentally ‘friendly’ production process. Thus, the experiment is similar to the Boyce et al. study in that we add a moral dimension to some of the treatments. Our experiment, however, has been designed to observe whether people place a monetary value, not only on the consumption of eggs, but also, on the welfare of hens producing ecological eggs and on the environment. Thus, it is our contention that it is the assignment of moral responsibility associated with an assignment of property rights, giving rise to expressions of intrinsic value, that explains the valuation disparity.

2. The experiment — a theoretical background Following the experimental design of Boyce et al. we compared four conditions in our experiment. In the first set of conditions, participants were asked either to submit bids to purchase a single half-dozen carton of conventionally produced eggs, or they were given a carton of eggs and then asked to submit offers to sell the eggs back to the experimenter. A moral dimension related to the welfare of the hens and the quality of the environment was added as follows. In the second set of conditions participants were informed about the welfare-enhancing process of producing ecological eggs, and under conditions analogous to the first set of conditions, asked either to submit a bid to purchase the eggs, or to submit an offer to sell the eggs. Thus, there is a broader moral dimension in our experiment as compared to the Boyce et al. experiment. In the first set of conditions, the participants were given no information concerning the production process of conventional eggs.

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In both sets of conditions, the property rights implied by the WTP and WTA measures were clearly assigned to either the experimenter or the participants. That is, participants were assigned rights to the eggs in the WTA conditions, while in the case of those asked to submit an offer in the WTP conditions, they were assigned no rights to the eggs. The relationship between WTP and WTA measures and property rights has been thoroughly discussed in the context of contingent valuation (Mitchell and Carson, 1989; Schmid, 1995; Vadnjal, 1995; Vatn and Bromley, 1995) and environmental economics more generally (Randall, 1987; Freeman, 1993). However, the idea that there is a moral responsibility component associated with the assignment of property rights appears to have received much less attention in the literature. Boyce et al. explains the relationship between property rights and moral responsibility, suggesting the assignment of property-rights may affect the participants’ perception of the allocation of moral responsibility. We interpret the ecological egg conditions in a similar way to that of Boyce et al. In the WTP condition, moral responsibility for the welfare of the hens may be viewed by participants as resting partially in the hands of the experimenter, and in the WTA condition, moral responsibility for the welfare of the hens and the environment, may be viewed by participants as resting with themselves. However, there are several notable similarities and differences between the experimental setting of the Boyce et al. study and our study. One difference relates to the informational context in which the two experiments are set. In the Boyce et al. study, in the WTA condition at least, there was a clear and strong allocation of moral responsibility, in that participants could avoid the tree being killed by not allowing the tree to be sold. In our study, however, the allocation of moral responsibility is less clear and weaker, in as far as respondents are not capable of directly influencing the welfare of ecological egg-producing hens or the environment. In other words, the participants’ perceptions of the allocation of moral responsibility relates to the welfare of these hens and the environment rather than the ecologi-

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cal eggs themselves. Thus, there is arguably an indirect and possibly weaker allocation of moral responsibility in our experiment compared with the Boyce et al. study. Secondly, while we stressed the animal welfare aspect associated with the production of ecological eggs, it is recognised that participants might also attach intrinsic value to more general and associated environmental improvements. Thirdly, Boyce et al. acknowledge that there may be an element of moral responsibility in the WTA-no kill condition as long as participants feel that they would be able to take better care of the tree than the experimenter were they to sell the tree. Thus, they suggest that some of the moral responsibility argument may apply to the treatments in which the trees are not killed. In our experiment, however, the allocation of moral responsibility relates to the welfare aspects of ecological-egg production. There would, therefore, seem to be little likelihood of participants feeling any degree of moral responsibility in the WTA condition for the welfare aspects of conventional egg production. Fourthly, Boyce et al. suggest that the asymmetrical assignment of responsibility may affect values so that WTA values will exceed WTP values. In our study, we similarly propose that a valuation disparity may occur due to the allocation of moral responsibility in the case of ecological eggs. However, the Boyce et al. interpretation of intrinsic value, and hence their equating it with moral responsibility, remains vague. There have been numerous meanings assigned to intrinsic value, beginning with Krutilla (1967) and others (Routley and Routley, 1979; Brookshire et al. 1986; Callicot, 1986; Hare, 1987; Norton, 1987; Rolston, 1988; Mitchell and Carson, 1989; ICUN, 1990) causing considerable misunderstanding (Green et al., 1990; O’Neill, 1993; Aldred, 1994). To avoid any unnecessary confusion; intrinsic value is referred to, in the context of our experiment, as the value participants attach to welfare changes that are not directly related to changes in their own welfare but rather to recognition of the welfare inherent in ecological egg producing hens and the environment. In the ecological egg conditions, intrinsic value is associated with the value

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participants attach, not to the consumption of the eggs, but to knowing or believing they are indirectly influencing or supporting ecological-egg production. Fifthly, while Boyce et al. use an extraordinary (comprising the killing of a tree), ours is a normal good. Finally, following Boyce et al., our suggestion that the valuation disparity has moral dimensions is intended to supplement rather than replace Kahneman et al. (1991) notion of an endowment effect. That is, in both the conventional and ecological egg conditions, loss aversion may result in participants demanding more compensation to forego their eggs compared with the amount of money they are willing to pay to gain the eggs. But it is the assignment of moral responsibility in the ecological egg conditions that may lead to an increase in the disparity between WTP and WTA. Thus, with these comments in mind, it is our contention that the assignment of moral responsibility in the ecological egg (E) conditions (WTA-E and WTP-E) will cause a larger disparity between WTP and WTA as compared with the conventional egg (C) conditions (WTA-C and WTP-C).

3. The experiment

3.1. Experimental design A total of 76 students from the Swedish University of Agricultural Sciences and the University College of Ga¨vle agreed to participate in this experiment. Students came from classes of business administration, economics and chemistry. The use of student samples is nowadays a common practice in experimental economics. Evidence to date suggests that the behaviour of students does not differ markedly from the behaviour of decision-makers recruited in naturally occurring markets (see Smith et al., 1988; Dyer et al., 1989). In the context of our experiment students are also relevant decision-makers as the majority are selfcatering and egg consumers. However, the attitudes of students may differ from those of the general population. For instance, students may be more environmentally as well as animal welfare

conscious. This may have affected the extent of the valuation disparity in the ecological egg conditions. In choosing the commodity to be used in this experiment we decided that the commodity should comprise some element of intrinsic value. We have already noted the definitional confusion that surrounds notions of intrinsic value. In the context of our experiment, intrinsic value refers to the value participants attach to the welfare of ecological egg-producing hens as well as the quality of the environment. In order to gauge whether participants attached intrinsic value to the process of enhancing the welfare of ecological egg-producing hens, or more general environmental improvements, they were asked to respond to follow-up questions concerning factors motivating their response. The follow-up questions are described in the following section. In the experiment, participants in the ecological egg conditions were informed that hens producing these eggs are housed in floor systems with a maximum of seven hens per square metre (indoors during the winter months and outdoors during the summer months) and fed fodder produced using no artificial fertilisers or pesticides (KRAV, 1997). The ecological egg production system is deemed to be superior, from an animal welfare point of view, as this system allows the animals to perform additional natural behaviour patterns. Moreover, the fact that the animals can move freely strengthens their skeletons and muscles (Jordbruksverket, 1996). Apart from the welfare of the hens, however, participants were also informed that the use of no artificial fertilisers or pesticides is consistent with the long-term sustainability of the agricultural ecosystem. Participants were also informed about some of the main advantages and disadvantages of ecological egg production. The experiment was run as an auction and was implemented in four separate conditions, two in which participants were either buying or selling conventional eggs and two in which participants were either buying or selling ecological eggs. Thus, to examine our contention that the assignment of moral responsibility in the ecological eggs conditions will cause a larger disparity between WTP and WTA as compared with the

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conventional egg conditions, we test two hypotheses. These are summarised below. H0: WTA-C= WTP-C H1: WTA-C\ WTP-C H0: WTA-E= WTP-E H1: WTA-E\ WTP-E

3.2. Method The chosen auction mechanism used in our experiment was the multiple-unit Vickrey (Vickrey, 1961) auction (MUVA). The Vickrey auction mechanism has been the preferred auction mechanism in a number of real exchange experiments (Shogren et al., 1994; Menkhaus et al., 1992). The MUVA is a theoretically incentive compatible auction mechanism. In the experiment, three halfdozen cartons of eggs each were auctioned off at the fourth highest price. A fourth price auction was used instead of a second price auction as it was deemed necessary to auction off more than one package of eggs to ensure the interests of the participants was maintained throughout the auction. The incentive compatibility property of the auction implies that there are no incentives to bid higher or lower than a bidder’s true valuation of the commodity. If bidders state a higher bid than their true valuation of the commodity, they risk purchasing the object for a higher price than their true valuation of the commodity. Similarly, if they state a lower price than their true valuation of the commodity, they run the risk of losing the auction at a price which is less than their true valuation of the commodity. The incentive compatibility of the MUVA was explained in the instructions, both theoretically as well as by a numerical example. Although incentive compatible, the Vickrey auction mechanism may sometimes induce instances of competitive bidding (Cox et al., 1985). However, researchers are divided on the issue of how serious a problem over bidding is (see Kagel et al., 1987) for a view de-emphasising the importance of overbidding). The experiments were conducted in classrooms and participants took part in only one session. Before the instructions were handed out partici-

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pants were asked to obey the same rules as for an exam; that is, they were told not to speak to anyone or to pass on any notes, and so forth. They were also asked to raise their hands if they had any questions. When the instructions had been handed out participants were instructed to start reading them. Upon reaching the point in the instructions where the workings and incentive compatibility of the multiple unit Vickrey auction was explained, the experimental leader read this part out loud. The auctioned commodity in two of the conditions comprised half-dozen cartons of conventionally produced eggs, with an approximate retail price of 10 SEK. In the other two conditions, half-dozen cartons of ecologically produced eggs were used, with an approximate retail price of 15 SEK. The retail price of the eggs was not disclosed to the students in either the conventional treatment or the ecological treatment. However, the majority of students in Sweden are self-catered which means that most of them are familiar with egg purchases and prices. Information about the ecological production process was provided to the participants in the two conditions comprising the ecological eggs. In the two conditions with conventionally produced eggs no information, apart from the instructions, was provided. Participants in the WTP-C group were given 40 SEK while participants in the WTA-C were given 30 SEK. Participants in the WTP-E group were given 40 SEK and participants in the WTA-E group were given 25 SEK. The rationale for the difference in the initial income amounts was to start off participants in the WTP groups at the same level of initial utility as those in the WTA groups. This was done in order to control for income and substitution effects as potential explanations for the WTA/WTP disparity (see Hanemann, 1991). It was explained to participants that a participation fee would be given to them after the experiment and that the price, that the winning bidders would pay would be deducted from the fee. In the WTP groups, the winners of the auction would pay for and collect the eggs after the experiment. It was explained to participants in the WTA groups that everyone except the winners could collect their cartons of eggs after the experiment.

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158 Table 1 Experimental results Conditions

Mean

S.D.

N

WTA-C WTP-C WTA-E WTP-E

16.8 14.6 21.0 13.2

14.11 10.39 11.83 6.48

18 19 19 18

Ratio

1.15 1.59

The auction was run as a one-shot auction, that is, there was only one trial and it was binding. In an experiment designed to test for the difference between WTP and WTA Shogren et al. (1994) used a repeated bid auction and found convergence between the two measures. However, in the Shogren et al. experiment, bids were posted after each trial, which may have influenced the convergence. As Harrison (1995) points out, repetition of the Vickrey auction may result in a revision of what subjects perceive the price of field substitutes to be and in so far as this affects the participants bidding, the repetition of the Vickrey auction will influence the distribution of the observed bids. Upon completion of the MUVA exercise, but prior to posting the winning bids, participants were presented with follow-up questions concerning factors motivating their response. They were asked to list, and to rank in order of importance, the three most important factors that had motivated their bids or offers in the auction. These follow-up questions were presented to participants in all four conditions.

4. Results The experimental results are summarised in Table 1. In both the conventional egg conditions and the ecological egg conditions the mean WTA values clearly exceed the mean WTP values. Most Table 2 Mann–Whitney U-test Hypothesis

z

p

WTA-C\WTP-C WTA-E\WTP-E

0.62 2.01

0.2676 0.0228

importantly, however, the disparity between WTP and WTA in the ecological egg conditions is exacerbated compared with the disparity between the two measures in the conventional egg conditions. The results of a one-tailed Mann–Whitney Utest are presented in Table 2.1 In the ecological egg conditions the difference between the mean WTP and WTA is significant at the PB0.05 level. In comparison, however, the difference between the mean WTP and WTA in the conventional conditions is not statistically significant at the PB 0.05 level. In other words, at the PB 0.05 level we reject the null hypothesis that WTA-E= WTP-E and accept the null hypothesis that WTAC= WTP-C. Thus, these results provide support for our contention that the assignment of moral responsibility causes a larger disparity between WTP and WTA as compared with the conventional egg conditions. Moreover, our suggestion in Section 2 that the assignment of moral responsibility gives rise to expressions of intrinsic value in the ecological egg conditions is supported by the comments made by participants when asked to rank in order of importance the three most important factors that had motivated their bids or offers. In both the WTP and WTA conditions, participants indicated a combination of motivational factors. That is, participants stated that their bids or offers were motivated by the well-being of the hens, animal care aspects or the knowledge that free-range hens were better off. They were also motivated, albeit less frequently, by more general concerns, such as the knowledge that fodder produced without pesticides would be better for long-term agricultural sustainability, positive impacts on the environment and ecologically sound production.2

1 The Mann-Whitney U-test is a non-parametric test. This was used because distributions in all groups except WTP-E were skewed. Furthermore, bids in the WTP-E group were bimodal. 2 Approximately 60% of the subjects in the ecological egg conditions stated either animal welfare or environmental concerns, or a combination of the two, as the two most important factors influencing their bids. The equivalent figure for the three most important factors is almost 80%.

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The inclusion of follow-up questions also enabled us to detect possible instances of what Bohm (1972) refers to as auction fever. In our experiment, we defined auction fever as occurring where participants made bids or offers that were primarily motivated by a desire to be the winning bidder rather than by the value to them of the commodity in question. In one case, in the WTP-C condition, a participant bid 50 SEK and stated in the follow-up questions that the most important factor influencing the bid was to win the auction. Thus there is reason to believe that this bid was not a true measure of the value of the eggs to the participant and the bid was excluded from the statistical analysis. We also excluded a bid of 105 SEK in the WTA-C condition. This bid was classified as an extreme value in a box-plot analysis (i.e. the bid was more than three box lengths from the 75th percentile).

5. Conclusions The results presented in this paper would appear to confirm the findings of the Boyce et al. study. There are, however, several important features of our study that we believe offer further clarification on the moral dimensions of the disparity between WTP and WTA measures. First of all, we sought to explicitly avoid the vagueness associated with the term intrinsic value, by defining it as the value participants attach to the welfare of ecological egg-producing hens and the environment. In the follow-up questions, participants clearly stated that their bids or offers in the ecological egg conditions were motivated by their concern for the welfare of the hens. However, they also expressed their concerns for the welfare of the environment in general. Thus, in our study, it seems reasonable to conclude that the disparity between WTP and WTA has been largely due to the intrinsic value related to a combination of animal welfare and environmental sustainability concerns. Secondly, in the Boyce et al. study, the ratio of means in the no kill conditions is 1.66 and 2.36, in the WTP and WTA kill conditions, re-

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spectively. In our study, the ratio of means are 1.15 and 1.59 for the conventional egg and ecological eggs conditions, respectively. That there is larger difference between the ratio of means in the Boyce et al. study (0.70) compared with our study (0.44) may have something to do with our earlier suggestion that our experimental design produces a comparably weaker allocation or moral responsibility. Thus, it may be useful to think in terms of degrees of moral responsibility. That is, it may be the case that the valuation disparity actually increases with a corresponding increase in the degree of assigned moral responsibility. The moral responsibility associated with knowing the tree will be killed if participants choose not to buy or sell the tree, in other words, is greater or more significant than the situation in which participants are buying and selling ecological eggs. Finally, Schmid (1995) has pointed out that no contingent valuation study can escape the property rights question of whether to measure WTP or WTA. However, to the extent that the assignment of property rights affects peoples’ perceptions of the allocation of moral responsibility, it would seem necessary that consideration also be given to the moral dimensions of WTP and WTA measures. The results presented in this paper give support to criticism of the current practice of generally recommending WTP measures in contingent valuation (Freeman, 1993). Such a practice is in some cases likely to produce valuations that are seriously biased and which thus undermine the policy assessments upon which they are based.

Acknowledgements This paper was sponsored by the Faculty of Agricultural Sciences at the Swedish University of Agricultural Sciences and the Swedish Council for Forestry and Agricultural Research. The authors would like to thank two anonymous readers and Leif Peter Frykblom, Ruben Henry Hoffman and Fredrik Harry Holstein for their helpful comments on earlier drafts of this paper.

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Appendix A A.1. Instructions (translated from Swedish) 3 A.1.1. Introduction The objective of organic farming is to keep long-term sustainable production of food and other products in a system based on local and renewable resources where plant cultivation and animal husbandry is well integrated. This requires that a major part of the fodder shall be organically grown and grown on the home farm. KRAV rules governing egg production demands that the needs of the hens are fulfilled and that they are able to perform their specific behaviour patterns. The rules also state that hens shall have access to sand-baths, perches and laying places to such an extent that the animals can use these freely. The amount of room is also regulated and the regulations state that there should be no more than seven hens per square metre of floor. Moreover, these pastoral areas shall be covered so as to ensure adequate fodder and plentiful opportunity for occupation. However, ecological egg production is not without its problems. Commercial laying hens are the result of breeding for high egg production in cages for more than 40 years. They have thus become adjusted to a cage environment, and as a consequence, their familiarity with the natural environment has deteriorated. The main disadvantage of cages is that hens have limited room for movement and that they cannot sand-bath nor lay eggs in laying places. The advantage is that production is safe and that feather plucking and cannibalism is limited to single cages. The advantages of ecological egg production are: “ that hens can perform their natural behaviour patterns such as laying eggs places, sitting on perches, scratching and sand-bathing; “ that hens have a large freedom of movement which strengthens their skeletons and muscles; 3 The following instruction are for the WTP ecological egg condition. The WTP and WTA conventional egg conditions differed only as far as they were not informed about the production process.

“

the fodder that is provided to the hens is organically farmed, that is, it does not contain artificial fertilisers and pesticides, which contributes to the keeping and strengthening of the long-term production capacity of land and the rest of the agricultural ecosystem. The disadvantages of the ecological production are: “ a high share of the eggs are not laid in the laying place; “ high sensitivity of deficiencies in the composition of the fodder; “ problems with cannibalism and feather plucking; “ widely varying production results between different rounds. A.1.2. Instructions for the auction In this experiment we will create a market in which you will be given the opportunity to buy a single half-dozen carton of ecological eggs. Three cartons of the eggs will be sold in the auction and each participant will be given the opportunity to buy one carton each. The auction will be run as a quiet auction. That is, all bids will be written down and will not be revealed to any other participant. All bids will be treated with confidentiality. A.1.3. How are the buyers determined? The three eventual buyers will be determined by those individuals who state the three highest bids. The price which the buyers eventually pay will be equal to the fourth highest bid. Before we start the experiment we will discuss different bidding strategies. It is important that you understand which is the best strategy for you. Let us assume you have decided you are willing to pay 100 SEK for the good. Let us call this your true valuation of the good. What then will be your best strategy: to bid higher than 100 SEK, lower than 100 SEK or to bid exactly 100 SEK? The answer is: bid exactly 100 SEK. If you bid less than 100 SEK (e.g. 50 SEK) the auction may be won by the three highest bids (e.g. 70, 80, and 90 SEK), and you be able to buy the good although you were actually prepared to pay more than the fourth highest bid of 60 SEK. To bid less than your true valuation, therefore, is not a good strategy.

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If you bid more than 100 SEK (e.g. 130 SEK) you can win the auction and be forced to pay more than your true valuation (e.g. the fourth highest bid is 110 SEK). To bid more than your true valuation, therefore, is not a good strategy. Let us go through a numerical example: Bidder 1 2 3 4 5 6 7

True value (SEK) 100 90 80 70 60 50 40

Bid (SEK) ? 90 80 70 60 50 40

You are bidder 1. This is a situation where you will win the auction if you bid your true valuation. Is there any reason for you to bid lower? No. If you, for example, underbid at 95 SEK this will not affect your buying price as you will pay the fourth highest bid equal to 70 SEK in any case. By underbidding at 95 SEK you will risk losing the auction if it is the case that, for example, bidders 2, 3 and 4 overbid at 97, 105 and 110 SEK. If bidders 2, 3 and 4 underbid at 85, 75 and 65 SEK you will pay 65 SEK irrespective of whether you have underbid at 95 SEK or if you have stated a bid of 100 SEK which is your true valuation. There is, therefore, no reason for you to underbid irrespective of what the others bid. The reason for this is that you cannot affect the price you are going to pay. Can you affect your situation by exaggerating your true valuation? No. If bidder 2, 3 and 4 overbid at 110, 120 and 130 SEK, respectively and you have bid more than 110 SEK, then you will win the auction but will have to pay 110 SEK which is more than your true valuation. If bidders 2, 3 and 4 overbid at 95, 85 and 75 SEK you will still win with a bid of 100 SEK. If bidders 2, 3 and 4 underbid at 85, 75 and 65 SEK, a 100 SEK bid from you will still win. There is therefore no reason for you to over bid, independent of what the others bid. The best strategy in this type of auction is to always bid the most you are prepared to pay. You will not risk paying more for the good than you are prepared to, and you will never have to pay

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more than the fourth highest bid. And why risk unnecessarily losing the auction by stating an underbid? A.1.4. How the auction works Remember that this auction is a quiet auction. All bids are written down and will not be revealed to any participant in the auction. Everybody in this room participates in the auction. Please do not show or discuss your bid with anybody else. You will soon be asked to write down your bid on the form provided. Once you have written your bid on the form, raise your hand and an assistant will come and collect the form. After all bids have been collected, the winners will be determined. The winners are the three individuals who have stated the three highest bids. Also the fourth highest bid will be determined and announced. It will not, however, be announced which participant stated this bid. All winners of the auction will be identified by the numbers they have been given. The buyers pay the fourth highest bid. The money is paid to the experimental leader after the end of the experiment. The winners are given the eggs after having paid for them. We want to know the value of the eggs to you. Only the winners in the auction described above will be able to buy the ecologically produced eggs. They are the ones with the three highest bids and they will pay the fourth highest bid. Please fill in the bid you wish to state. If you do not wish to state a bid, write a ‘0’ below. Remember it is in your interest to state truthfully what you are prepared to pay for the ecologically produced eggs. I am prepared to pay – – – – – – SEK here and now. After stating your bid please raise your hand.

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