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The Endowment Effect. Individuals with loss aversion or status quo bias may value a resource more highly once the property right is established.Seminal cite: Thaler 1980 JEBO. Evidence of the Endowment Effect. Traditionally tested using CVM or lab/market auctions, showing WTA > WTP Knetsch 1989 A
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1. What Endowment Effect?A Public Good Experiment
Edward J. López
Assistant Professor
Department of Economics
University of North Texas
elopez@unt.edu
William Robert Nelson, Jr.
Assistant Professor
School of Management
University at Buffalo
wrnelson@buffalo.edu
2. The Endowment Effect Individuals with loss aversion or status quo bias may value a resource more highly once the property right is established.
Seminal cite: Thaler 1980 JEBO
3. Evidence of the Endowment Effect Traditionally tested using CVM or lab/market auctions, showing WTA > WTP
Knetsch 1989 AER
Kahnemann, Knetsch and Thaler 1991 JEP
4. Endowment Effect as Anomaly Modeled as some manipulation (pivot/kink/rotation) of standard indifference curves at point of initial endowment
Morrison 1997 AER
Implies possibly intersecting indifference curves
Kahnemann, Knetsch and Thaler 1991 JEP
5. Value Disparities Commonly observed
Smaller for more substitutable goods
Hanemann 1991, 2003 AER (theory)
Shogren et al. 1994 AER (evidence)
Diminish with market discipline and market experience
Shogren et al. 1994, 1997 AER (lab auction evidence)
List 2003 QJE (field auction evidence)
6. Endowment vs. Substitution Controversy has recently centered on what explains observed value disparities
Endowment and Substitution alternative explanations
not necessarily mutually exclusive
not necessarily mutually inclusive
7. Summarizing the Literature Some degree of value disparity is commonly observed
Endowment and Substitution are alternative explanations
Market experience and discipline tend to reduce value disparities
EE is some pivot/kink/rotation of indifference curves at point of endowment
8. Our contribution The question of whether value disparities are preference-based (i.e., fundamental) remains.
Are preferences anomalous yet constrained in the usual manner by market institutions?
There may be value in testing for the presence of an endowment effect in a non-market situation that controls for the substitution effect as a viable alternative explanation.
9. Use a Public Good Game (VCM) Our design allows us simultaneously to:
Eliminate market discipline (uses public good)
Eliminate market experience (one shot)
Control for substitution effects (cash based)
Observe treatments that one would expect to elicit the endowment effect (account and duration framing)
10. The Experiment 2 person public good game (VCM)
MPCR=0.75
Each participant given $10 endowment
Each participant makes one decision
Number of dollars to contribute to public account
Two types of treatment variation
11. Treatment Variation 1 Account Framing (AF)
Private Group: told money starts in private account
Property right is established
Resembles WTA decision
Public Group: told money starts in public account
Initial endowment is shared
Resembles WTP decision
12. Treatment Variation 2 Duration Framing
Long Group: holds money for some time before making contribution decision
Short Group: makes decision immediately
Laboratory treatments
Short: holds cash for 1 minute
Long: holds cash for 25 minutes
Classroom treatments
Short-hold cash for 1 minute
Long-hold cash for 1 week
13. Why an Effect in AF? Originating account is initial property right
Focal point for prospective reciprocators to reach fairness equilibrium
Shelling 1960; Rabin 1993 AER
Warm glow and cold prickle might differ in magnitude
Andreoni 1995 QJE
14. Why an Effect in DF? Temporal component—EE may take time to bind
Knetch and Sinden 1984 QJE
Kahneman, Knetch and Thaler 1991 JEP
More readily part with windfall gains than earned wealth
Thaler and Johnson 1991
PIH
Friedman 1957
15. Hypotheses H1: AF imparts an endowment effect
Private group contributions less than Public group
money will tend to stay where it is said to start
H2: More time holding the endowment increases strength of endowment effect
Long group contributions less than Short group
16. Results Overview 284 undergraduate participants
From U. at Buffalo and U. of North Texas
No difference in responses that affect tests
The mean contributions
classroom treatments: 4.72
laboratory treatments: 4.61