Willingness-to-pay (WTP) estimates derived from discrete-choice experiments (DCEs) generally assume that the marginal utility of income is constant. This assumption is consistent with theoretical expectations when costs are a small fraction of total income. We analyze the results of five DCEs that allow direct tests of this assumption. Tests indicate that marginal utility often violates theoretical expectations. We suggest that this result is an artifact of a cognitive heuristic that recodes cost levels from a numerical scale to qualitative categories. Instead of evaluating nominal costs in the context of a budget constraint, subjects may recode costs into categories such as 'low', 'medium', and 'high' and choose as if the differences between categories were equal. This simplifies the choice task, but undermines the validity of WTP estimates as welfare measures. Recoding may be a common heuristic in health-care applications when insurance coverage distorts subjects' perception of the nominal costs presented in the DCE instrument. Recoding may also distort estimates of marginal rates of substitution for other attributes with numeric levels. Incorporating 'cheap talk' or graphic representation of attribute levels may encourage subjects to be more attentive to absolute attribute levels.
Copyright © 2010 John Wiley & Sons, Ltd.