Against Endowment Theory: Experimental Economics and Legal Scholarship

Abstract:     
Endowment theory holds the mere ownership of a thing causes people to assign greater value to it than they otherwise would. The theory entered legal scholarship in the early 1990s and quickly eclipsed other accounts of how ownership affects valuation. Today, appeals to a generic “endowment effect” can be found throughout the legal literature. Recent experimental results, however, suggest that the empirical evidence for endowment theory is weak at best. Familiar early experiments, which used trades of mugs and candy bars or the sale or purchase of lottery tickets, employed procedures that did not rule out alternative explanations. By altering the procedures, it is possible to make the “endowment effect” disappear in the presence of ownership. This and other recent evidence suggest that mere ownership does not affect willingness to trade or exchange. Many experimental economists no longer ascribe to endowment theory. Legal scholars, however, continue to apply endowment theory to predict how legal entitlements are likely to affect expressed valuations. That reliance is no longer warranted. Endowment theory’s influence in legal scholarship provides important lessons about how legal scholars and policymakers should, and should not, use results from experimental economics and cognitive psychology.

Number of Pages in PDF File: 61

Keywords: endowment effect, endowment theory, prospect theory, exchange asymmetries, ownership, behavioral economics

JEL Classification: K00, K10, K19

working papers series