R(W) is the amount an individual would exchange the certainty of state b for to receive the
certainty of state a. R(W) is defined as
Ub(W)=Ua(W-R(W)). (6)
Compensation and ransom should only theoretically differ by wealth effects. For the purpose of
this article, the amount of compensation needed to move farmers from state a (keeping their
financial records) to state b (losing their financial records) is determined by an experimental
auction. The ransom amount could not be calculated through experimental auctions since the
participating farmers were already in the state of possessing their records and not in the state of
having lost their records.
Experimental Auction Background
We use experimental auctions to elicit an individual farmer’s value of his/her financial records.
In the last decade, experimental auctions (EA) have become a popular method of non-market
valuation. EA have been recently used in agricultural economics literature to find consumer
willingness-to-pay (WTP) for items ranging from genetically modified food labels (Huffman et
al. 2003) to tenderness and flavor in steaks (Feuz et al. 2004). The primary advantages of
experimental auctions are the incentive compatible nature and nonhypothetical context of
auctions as EA involve real goods and real money (Lusk 2003). EA also have the benefit of
obtaining a WTP (or bid) from each subject, and the modeling determinants of WTP are
uncomplicated given the continuous nature of the dependent variable (Lusk and Hudson 2004).
Of the available experimental auction mechanisms, the Vickrey second-price auction has
often been used. The popularity of the second-price auction can be accredited to its
characteristics: it is demand revealing in theory, it is relatively easy to explain, and it has an
endogenous market-clearing price (Huffman et al. 2003). In a second-price auction, competitors
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