The Endowment Effect and First Party Enforcement of Rights: Evidence from the Black Market

Abstract

In the classical economic view of markets a third party is needed to create and protect property rights. This should make black markets where the government actively opposes rights in the goods and services traded impossible, yet we see functional black markets across the world. We argue that the endowment effect drives the creation of and respect for property rights. We build a game theoretic model demonstrating this process which shows how the expectation of first party enforcement creates a bilateral incentive to respect property rights regardless of third party involvement. We further give evidence of how the endowment effect exists in both animals and humans, resulting in lower levels of violent conflict and apparent respect for property rights, connecting the biology literature on territoriality in animal species with the economic property rights behavior of humans.

Keywords: property rights; endowment effect; black markets

JEL Classification: P48, K420, K110, P140, P480