Endowment Effects Within Corporate Agency Relationships
New York University School of Law
Matthew L. Spitzer
Northwestern University School of Law
Eric L. Talley
Columbia University - School of Law; University of California, Berkeley - Boalt Hall School of Law
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
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.
Number of Pages in PDF File: 41
Date posted: July 16, 2001