The “Endowment Effect”:

Larry Ribstein is away from Ideoblog for a few weeks and he has a bunch of guest bloggers. Lots of great stuff over there (so far, no movie reviews).

Josh Wright has a post up on the “The Endowment Effect’s Disappearing Act” which discusses in some detail the superb paper by Charlie Plott and Kathy Zeiler on the so-called endowment effect. (I noted the working paper here about a year ago, but Josh’s discussion is more extensive). In short, they conclude that findings of a supposed “endowment effect” results from experimental design rather than actually demonstrating what is being tested for. The effect seems to disappear once controls are imposed on the experiments, suggesting that there is something else at work here.

Josh also notes a few concerns about advocating policy recommendations on the basis of the endowment effect.

Production of papers grounded in the “endowment effect” has become quite a cottage industry in recent years. A quick Westlaw search this morning in the JLR database comes up with 541 references to the “endowment effect.” Many of these papers even discuss the “endowment effect” as supposedly modeling behavior by firms, as opposed to individuals. (As Alchian would observe, even if the endowment effect existed, firms would likely emerge as a response to it rather than an application of it and there would likely be minimal consequences for allocational efficiency). And accepting the endowment effect can generate a host of interesting policy recommendations and normative conclusions. Like Josh, I am curious to see what effect, if any, the Plott and Zeiler paper has on the production and publication of law review articles based on the endowment effect.