Fair Territory: Preferences, Bargaining, and the Endowment Effect

Abstract

We examine an evolutionary model of bargaining behavior in a society where resources are finite. Agents who develop better strategies for bargaining and trading come to dominate the population. We show that successful agents exhibit loss aversion and an "endowment effect." When information is symmetric, a norm of equity is evolutionarily stable and efficient. In this case, disagreement arises when there is uncertainty concerning the gains to trade. The social institution of private property may emerge spontaneously when information concerning individual endowments is private. As in the symmetric information case, disagreement (or inefficiencies) arise when there is uncertainty over the gains from trade.

JEL Classification: C78, D83