Endowment Effects Within Corporate Agency Relationships

41 Pages Posted: 16 Jul 2001  

Jennifer Arlen

New York University School of Law

Matthew L. Spitzer

Northwestern University School of Law

Eric L. Talley

Columbia University - School of Law

Date Written: August 2001

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.

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: https://ssrn.com/abstract=276110 or http://dx.doi.org/10.2139/ssrn.276110

Jennifer Arlen (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=20658

Matthew L. Spitzer

Northwestern University School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-8434 (Phone)

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

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