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Endowment Effects Within Corporate Agency Relationships


Jennifer Arlen


New York University School of Law

Matthew L. Spitzer


Northwestern University School of Law

Eric L. Talley


University of California, Berkeley - Boalt Hall School of Law

August 2001

USC CLEO Research Paper No. C01-1; USC Law and Economics Research Paper No. 01-8; Yale Law & Economics Research Paper No. 261
Journal of Legal Studies, Vol. 31, p. 1, 2002

Abstract:     
Behavioral Law and Economics has become an increasingly prominent field within legal scholarship, and most recently within the corporate area. A behavioral bias of particular relevance in corporate contexts is the differential between individuals' willingness to pay to obtain a legal entitlement and her willingness to accept to part with one, known as the "endowment effect." Should endowment effects pervade relationships within business organizations, it would significantly complicate much of the common wisdom within corporate law, such as the presumed optimality of ex ante voluntary agreements. Existing experimental research, however, does not adequately address whether and to what extent the endowment effect operates within corporate environments.

This Article presents an experimental test for endowment effects within a principal-agent relationship that typifies many firms. We find that subjects situated in an agency relationship do not exhibit a significant endowment effect. Using an additional experimental test, we argue that this dampening phenomenon is likely due to the fact that the agency context induces subjects to view property rights principally for their exchange value, thereby causing them to "disendow" their initial legal entitlements.

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Date posted: July 16, 2001  

Suggested Citation

Arlen, Jennifer and Spitzer, Matthew L. and Talley, Eric L., Endowment Effects Within Corporate Agency Relationships (August 2001). USC CLEO Research Paper No. C01-1; USC Law and Economics Research Paper No. 01-8; Yale Law & Economics Research Paper No. 261; Journal of Legal Studies, Vol. 31, p. 1, 2002. Available at SSRN: http://ssrn.com/abstract=276110 or http://dx.doi.org/10.2139/ssrn.276110

Contact Information

Jennifer Arlen (Contact Author)
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
Matthew L. Spitzer
Northwestern University School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
312-503-8434 (Phone)
Eric L. Talley
University of California, Berkeley - Boalt Hall School of Law ( email )
215 Boalt Hall
Berkeley, CA 94720-7200
United States
(510) 642-7875 (Phone)
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