Abstract
The endowment effect suggests that consumer preferences are reference-dependent; i.e., that the shapes of indifference curves depend on an agent’s initial endowment and the direction of exchange offers. Hence, a person may value a good more highly once ownership is established, causing disparity between willingness to accept and willingness to pay value measures. In this paper we test for the endowment effect in a manner that does not rely on observing value disparities. We employ a one shot voluntary contribution mechanism (VCM) with treatments for account framing, duration effects, and the physical handling of the initial endowment. The treatments are designed to vary subjects’ perceived ownership over their experiment endowments. Results generally fail to support reference-dependence in manners suggested by the endowment effect. Contribution rates are higher when initial endowments begin in subjects’ private accounts compared to when originating in the shared public account. Contributions are no different when subjects hold their endowments for up to one week. And contributions are higher among subjects who physically handle cash compared to those indicating their decisions in writing.
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Notes
- 1.
See Horowitz and McConnell (2002) for a survey of WTA-WTP studies, but note that results vary. Most of this type of evidence have come from laboratory experiments, but increasing amounts of field evidence continues to emerge. Macmillan et al. (1999), for example, compared donations to an actual charity under alternative contingent valuation procedures, and List (2003, 2004) observed bid and ask prices for sports memorabilia in actual markets.
- 2.
Plott and Zeiler (2005) found no evidence of a WTP-WTA gap after extensive subject education and practice with a modified Becker–DeGroot–Marschak mechanism.
- 3.
One anonymous reader characterized an early version of this paper as considering “whether the endowment effect–people seem to dislike giving something up more than they like getting it–exists in a VCM...”
- 4.
Some of the WTA-WTP auction experiments have controlled for substitution effects (magnitude of the MRS) as well as income effects (movement among alternative indifference curves). See, in particular, List (2004) and Shogren et al. (1994). The present design holds substitution constant and implicitly assumes negligible income effects.
- 5.
The subsequent cited studies also achieved greater control by eliminating the need for subjects to calculate expected winnings, and differing attitudes toward risk, associated with lottery tickets.
- 6.
Going further, Kahneman et al. (1991) argued that the endowment effect can result in intersecting indifference curves.
- 7.
Hanemann (1991) reformulated the bounds on the neoclassical compensating and equivalent variations determined earlier by Willig (1976) and Randall and Stoll (1980). He reduced the difference between WTA and WTP to the ratio of the income elasticity of the public good to the elasticity of substitution between public and private goods. As we will argue, our experiment assumes negligible income effects and holds the substitution effect constant in treatments designed to elicit an endowment effect.
- 8.
See also Brookshire and Coursey (1987), Coursey et al. (1987), and List (2003, 2004). The effect of market discipline/experience appears to be sensitive to institutional design. There are many institution-specific explanations for observed value disparities. First the perceived illegitimacy of a transaction might cause the required (narrowly interpreted) surplus from the transaction to exceed epsilon, thereby driving a wedge between WTP and WTA (e.g., Rowe et al. (1980)). Second, buyers are often able to negotiate a lower price if they understate their WTA; if the associated rules of thumb are adopted, then equilibrium WTA exceeds WTP (Knez et al. 1985). In surveys and one-shot acutions, reported preferences might be misrepresentations/mistakes, but in repeated market interactions such mistakes tend to diminish in magnitude and frequency. Third, WTP and WTA might vary according to which elicitation mechanism is used (Shogren et al. 2001).
- 9.
In value disparity experiments, WTA assigns the agent rights to the good while WTP offers the opportunity to acquire the good. By varying the originating account, the VCM experiment may mimic this difference regarding the direction of the exchange offer.
- 10.
To our knowledge, Strahilevitz and Loewenstein (1998) is the closest to this study in testing for duration effects. The derive duration-effect hypotheses by combining a prospect theory value function with adaptation, a concept in psychology, which “in the context of object ownership, is the tendency for people to become psychologically accustomed to changes in their material situation” (Strahilevitz and Loewenstein 1998, p. 277). Duration treatments up to one hour have been introduced in a variety of experiments employing WTP and WTA elicitation questionnaires. Results indicated that subjects generally express greater WTP and WTA as the endowment is held for a longer duration. We are unaware of other experimental results on duration effects.
- 11.
Note that we compare only the Short groups from the duration treatments.
- 12.
In the AF treatments, the participants were told that the initial endowment originated in a particular account, but the DF instructions included no reference to the originating account.
- 13.
Similarly, Andreoni (1995) also found that the warm glow is stronger than the cold prickle. In his experiment, contributions to the public good were greater when the game was explained in terms of a positive rather than a negative externality. In both his treatments, all money began in each individual’s “Investment Account,” and participants chose between depositing tokens in a “Private Exchange” and a “Public Exchange.”
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Acknowledgements
We thank the Russell Sage Foundation Behavioral Roundtable for financial support. We thank Daniel Houser, John List, Vernon Smith, and Bart Wilson for helpful comments. Kari Battaglia, Mark Strazicich, and David Molina graciously donated class time for generating some of the data. We also thank Todd Jewell, Ife Isiekwe, Sangkyoo Kang, Jae Hoon Kim, Kaunyoung Lee, Nathan Roseberry, Diego Segatore, Shanhong Wu, and Oksana Zhuk for assistance monitoring the experiments.
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Lopez, E.J., Nelson, W.R. (2017). The Endowment Effect in a Public Goods Experiment. In: Hall, J. (eds) Explorations in Public Sector Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-47828-9_10
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