Document Type
Discussion Paper
Publication Date
11-17-2025
CFDP Number
d2473
CFDP Pages
72
Journal of Economic Literature (JEL) Code(s)
D81, G12, G14
Abstract
This paper develops probability pricing, extending cash flow pricing to quantify the willingnessto-pay for changes in probabilities. We show that the value of any marginal change in probabilities can be expressed as a standard asset-pricing formula with hypothetical cash flows derived from changes in the survival function. This equivalence between probability and cash flow valuation allows us to construct hedging strategies and systematically decompose individual and aggregate willingness-to-pay. Four applications examine the valuation of changes in the distribution of aggregate consumption, the efficiency effects of varying performance precision in principal-agent problems, and the welfare implications of public and private information.
Recommended Citation
Dávila, Eduardo; Parlatore, Cecilia; and Walther, Ansgar, "Probability Pricing" (2025). Cowles Foundation Discussion Papers. 2895.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/2895