The Volokh Conspiracy - THE "ENDOWMENT EFFECT" AND BEHAVIORAL ECONOMICS:

Another interesting article by one of my colleagues is a forthcoming article by my colleague Kathy Zeiler, co-authored with the legendary Charlie Plott, in the American Economic Review on the so-called "endowment effect." The "endowment effect" has emerged as a staple of behavioral economics, especially in critiques of the real-world validity of the Coase Theorem. Plott and Zeiler conclude, "The primary concluion that one derives from the data reported here is that any observed WTP-WTA gap is not a reflection of a fundamental feature of human preferences." Instead, they conclude that the results of studies that find a WTP-WTA gap are an artifact of the particualr experimental procedures that are used in the studies, and thus are extermely sensitive to changes in experimental conditions and procedures, rather than a stable characteristic of individual preferences.

The article also has a very useful and comprehensive bibliographic collection of all of the studies that have been done on the endowment effect and the methodologies used in them.

Update:

It has been called to my attention that many readers don't know what the "endowment effect" or the "WTP-WTA" gap is. The endowment effect postulates that people place a different value on a given item depending on whether they possess it or do not, as reflected by the WTP-WTA gap. Thus, if I am given a generic mug, it is postulated that I might only be willing to sell it to someone else ("Willing to Accept") for, say, $5. But if you are given the exact same mug, I might be willing to pay only $2 to buy it from you. It is argued that there is, therefore, a persistent gap between what I am willing to accept to alienate the mug on one hand, and what I am willing to pay on the other hand, and that this difference is explained by the mere coincidence of how the intial property right is allocated. As noted, the finding of an "endowment efffect" has been used to criticize the Coase Theorem, in that it suggests that even where transaction costs are low, parties will not necessarily bargain to allocate resources to their highest-valued use because the endowment effect suggests that parties will not be able to easily bargain-around the initial rights allocation. The study I cite concludes that there is in fact no endowment effect and no robust finding of a systematic gap that leads to a higher willingness to accept than willingness to pay for a given good.

	[Todd Zywicki, December 9, 2004 at 4:09pm] Trackbacks THE "ENDOWMENT EFFECT" AND BEHAVIORAL ECONOMICS: Another interesting article by one of my colleagues is a forthcoming article by my colleague Kathy Zeiler, co-authored with the legendary Charlie Plott, in the American Economic Review on the so-called "endowment effect." The "endowment effect" has emerged as a staple of behavioral economics, especially in critiques of the real-world validity of the Coase Theorem. Plott and Zeiler conclude, "The primary concluion that one derives from the data reported here is that any observed WTP-WTA gap is not a reflection of a fundamental feature of human preferences." Instead, they conclude that the results of studies that find a WTP-WTA gap are an artifact of the particualr experimental procedures that are used in the studies, and thus are extermely sensitive to changes in experimental conditions and procedures, rather than a stable characteristic of individual preferences. The article also has a very useful and comprehensive bibliographic collection of all of the studies that have been done on the endowment effect and the methodologies used in them. Update: It has been called to my attention that many readers don't know what the "endowment effect" or the "WTP-WTA" gap is. The endowment effect postulates that people place a different value on a given item depending on whether they possess it or do not, as reflected by the WTP-WTA gap. Thus, if I am given a generic mug, it is postulated that I might only be willing to sell it to someone else ("Willing to Accept") for, say, $5. But if you are given the exact same mug, I might be willing to pay only $2 to buy it from you. It is argued that there is, therefore, a persistent gap between what I am willing to accept to alienate the mug on one hand, and what I am willing to pay on the other hand, and that this difference is explained by the mere coincidence of how the intial property right is allocated. As noted, the finding of an "endowment efffect" has been used to criticize the Coase Theorem, in that it suggests that even where transaction costs are low, parties will not necessarily bargain to allocate resources to their highest-valued use because the endowment effect suggests that parties will not be able to easily bargain-around the initial rights allocation. The study I cite concludes that there is in fact no endowment effect and no robust finding of a systematic gap that leads to a higher willingness to accept than willingness to pay for a given good.