Estimating willingness to pay by risk adjustment mechanism

Measuring consumers' Willingness To Pay (WTP) without considering the level of uncertainty in valuation and the consequent risk premiums will result in estimates that are biased toward lower values. This research proposes a model and method for correctly assessing WTP in cases involving valuation uncertainty. The new method, called Risk Adjustment Mechanism (RAM), is presented theoretically and demonstrated empirically. It is shown that the RAM outperforms the traditional method for assessing WTP, especially in a context of a nonmarket good such as a totally new product.