Willingness to Pay

Concept

Willingness to pay (WTP) is the maximum amount of money an individual would give up to obtain a good, service, health improvement or reduction in risk.

WTP expresses the value of a benefit in monetary terms. In health economics, it may be used to value improvements in health, access, convenience, treatment attributes or reductions in mortality and morbidity risks.

WTP is grounded in welfare economics. The maximum payment is the amount that would leave the individual indifferent between remaining in the original situation and paying to receive the improvement.

WTP is preference-based. It is influenced by how much the person values the improvement, but it may also be affected by income, ability to pay, available information, risk perception and the way the question is presented.

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The welfare-economic interpretation

For an improvement from health state (H_0) to health state (H_1), willingness to pay can be represented as:

$$ U(Y,H_0)=U(Y-WTP,H_1) $$

where:

• (U) is the individual’s utility;
• (Y) is the individual’s initial income;
• (H_0) is the initial health state;
• (H_1) is the improved health state; and
• (WTP) is the maximum payment that leaves the individual as well off as before the improvement.

The equation does not mean that utility can usually be observed directly. It provides the theoretical basis for estimating the monetary value of the improvement.

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What willingness to pay is used for

WTP can be used to:

• assign a monetary value to health or healthcare benefits;
• compare benefits and costs within cost-benefit analysis;
• value reductions in illness, injury or mortality risk;
• examine preferences for treatment characteristics or service delivery;
• estimate the value people place on access, convenience or waiting-time reductions;
• support public policy appraisal; and
• calculate measures such as the value of a statistical life from valuations of small risk reductions.

WTP does not by itself determine whether an intervention should be funded. The estimate must be interpreted alongside costs, the affected population, distributional consequences, uncertainty and the decision context.

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Individual WTP and aggregate benefits

WTP is initially an individual-level measure. For cost-benefit analysis, individual values may be aggregated across the relevant population.

A simplified aggregate benefit calculation is:

$$ \text{Aggregate monetary benefit}

\text{Mean WTP per person} \times \text{Relevant population} $$

This calculation is only appropriate when the survey sample, valuation question and population are sufficiently comparable. Analysts should examine the distribution of responses rather than relying only on the mean.

Mean WTP can be strongly influenced by a small number of high values. Median WTP may better describe the typical respondent, but it does not represent the same welfare aggregate as the mean. The choice must therefore be reported and justified.

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WTP is not a cost-effectiveness threshold

An individual’s WTP for a particular health improvement is not the same as a health system’s cost-effectiveness threshold.

• Individual WTP measures how much a person values a specified benefit or risk reduction in monetary terms.
• A cost-effectiveness threshold represents the value or opportunity-cost benchmark used to interpret incremental cost-effectiveness or net-benefit results.

The terms may both involve monetary values, but they answer different questions and should not be treated as interchangeable.

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How willingness to pay is estimated

Stated-preference methods

Stated-preference methods ask people to value a hypothetical good, service or outcome.

Contingent valuation presents a defined scenario and asks whether the respondent would pay a stated amount or asks for the maximum amount they would pay.

Discrete choice experiments ask respondents to choose between alternatives with different attributes, including a cost attribute. The estimated trade-off between an attribute and cost can be used to derive marginal WTP for that attribute.

These methods can value benefits that are not traded in conventional markets, but their validity depends heavily on the survey design and whether respondents understand and accept the scenario.

Revealed-preference methods

Revealed-preference methods infer values from observed behaviour. Examples include spending to reduce health risks, wage differences associated with occupational risks or choices involving travel time and access costs.

Observed behaviour may provide evidence about real trade-offs, but available choices, regulation, incomplete information and market constraints can limit what the behaviour reveals about preferences.

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Designing a WTP question

A credible WTP study should clearly specify:

• the health improvement, service or risk reduction being valued;
• the starting situation and proposed alternative;
• the population affected;
• the probability, timing and duration of the benefit;
• who would receive the benefit;
• the payment amount and payment vehicle;
• whether the payment is one-time or recurring;
• the respondent’s budget constraint;
• whether the outcome would occur if payment were not made; and
• how uncertain outcomes are presented.

The payment vehicle might be a tax, insurance premium, direct payment or contribution. It must be believable and appropriate to the decision context because different payment vehicles can produce different responses.

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Example

Suppose a contingent valuation survey asks respondents whether they would pay for a vaccination programme that reduces their annual probability of infection from 10% to 2%.

A respondent states that the maximum amount they would pay is £180.

For that respondent:

$$ WTP = £180 $$

This value applies to the specific programme, risk reduction, time period and payment conditions described in the survey. It should not automatically be transferred to a different disease, population or risk reduction.

If 500 respondents are surveyed, the analyst may calculate the mean, median, percentiles and proportion reporting zero WTP before considering whether the results can be aggregated or transferred to the target population.

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Willingness to pay and willingness to accept

Willingness to accept (WTA) is the minimum compensation an individual would require to give up a benefit or tolerate a loss.

WTP and WTA are related welfare measures, but they are not interchangeable. WTA can exceed WTP because of income constraints, limited substitutes, reference points, loss aversion or the way people perceive ownership and entitlement.

The appropriate measure depends on the property rights and policy scenario being evaluated.

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Common sources of bias

WTP estimates may be affected by:

• Hypothetical bias: stated payments may differ from what people would pay in reality.
• Starting-point or anchoring bias: an initial amount may influence the response.
• Strategic bias: respondents may overstate or understate WTP to influence a decision.
• Information bias: responses may change with the amount or framing of information provided.
• Scope insensitivity: WTP may not increase appropriately when the size of the benefit increases.
• Payment-vehicle bias: respondents may react to the proposed method of payment rather than the benefit.
• Protest responses: a zero or extreme response may reflect objection to the scenario rather than the respondent’s valuation.
• Selection bias: participants may not represent the population affected by the decision.

Survey development should include qualitative work, piloting, comprehension testing and sensitivity analyses.

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Income, equity and distribution

Because WTP is constrained by ability to pay, people with higher incomes may report higher values for the same health improvement. Aggregating WTP without examining income and distribution can therefore give greater influence to groups with more financial resources.

Analysts should report relevant socioeconomic characteristics, examine heterogeneity and discuss the equity implications of using WTP estimates. A monetary valuation should not be interpreted as an objective measure of clinical need or the intrinsic worth of a person’s health.

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Excel implementation

If individual WTP responses are recorded in cells B2:B501, useful summary calculations include:

• Mean WTP: =AVERAGE(B2:B501)
• Median WTP: =MEDIAN(B2:B501)
• 25th percentile: =PERCENTILE.INC(B2:B501,0.25)
• 75th percentile: =PERCENTILE.INC(B2:B501,0.75)
• Number of zero responses: =COUNTIF(B2:B501,0)
• Proportion of zero responses: =COUNTIF(B2:B501,0)/COUNT(B2:B501)

Responses identified as protests should not be removed automatically. Their identification, treatment and effect on the results should be documented and tested through sensitivity analysis.

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Interpretation and reporting

A WTP estimate should always be reported with:

• the outcome or risk change being valued;
• the valuation method;
• the respondent population and sample size;
• the currency and price year;
• the payment vehicle and payment frequency;
• the elicitation format;
• the treatment of zero, protest and extreme responses;
• the measure reported, such as mean or median;
• uncertainty around the estimate; and
• limitations affecting validity or transferability.

WTP estimates are context-dependent. They should not be transferred across populations, countries, time periods or health outcomes without assessing differences in income, prices, institutions, preferences and the scale of the benefit.

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Key distinction

WTP converts a person’s preference for a specified benefit into a monetary amount. It can support economic evaluation, but it does not remove the need to assess evidence quality, uncertainty, affordability, opportunity cost, equity or institutional decision criteria.

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Sources

• Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
• Hanemann WM. Willingness to Pay and Willingness to Accept: How Much Can They Differ? American Economic Review. 1991.
• Mitchell RC, Carson RT. Using Surveys to Value Public Goods: The Contingent Valuation Method. Resources for the Future.
• Organisation for Economic Co-operation and Development. Cost-Benefit Analysis and the Environment.
• Bridges JFP, Hauber AB, Marshall D, et al. Conjoint Analysis Applications in Health: A Checklist. Value in Health. 2011.