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

Posted: 28 Aug 2017

See all articles by Eric Hammer

Eric Hammer

Hamline University

Bryan Caplan

George Mason University - Center for Study of Public Choice

Date Written: August 23, 2017

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

Suggested Citation

Hammer, Eric and Caplan, Bryan, The Endowment Effect and First Party Enforcement of Rights: Evidence from the Black Market (August 23, 2017). GMU Working Paper in Economics Forthcoming. Available at SSRN: https://ssrn.com/abstract=3025229

Eric Hammer (Contact Author)

Hamline University ( email )

1536 Hewitt Avenue
St. Paul, MN 55104
United States

Bryan Caplan

George Mason University - Center for Study of Public Choice ( email )

Fairfax, VA 22030
United States
703-993-2324 (Phone)
703-993-2323 (Fax)

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