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Testing the Endowment Effect for Default Rules

Author

Listed:
  • Marcin Isabel

    (University of Heidelberg, Department of Economics, Bergheimer Str.58, 69115 Heidelberg, Germany)

  • Nicklisch Andreas

    (HTW Chur, Center for Economic Policy Research, and German Research Foundation, Research Group FOR 2104 “Needs-Based Justice and Distribution Procedures”, Comercialstr. 20, 7000 Chur, Switzerland)

Abstract

This paper explores potential endowment effects of contractual default rules. For this purpose, we analyze the Hadley liability default clause in a model of bilateral bargaining of lotteries against safe options. The liability default clause determines the right for the safe payoff option. We test the model in series of laboratory experiments. The results reveal a substantial willingness-to-accept to willingness-to-pay gap for the right to change lotteries against safe options. Even if we apply the incentive compatible Becker-DeGroot-Marschak value elicitation mechanism, there is a significant gap indicating a robust endowment effect caused by default rules. Differences of expected values of the lotteries and the safe options consistently decrease the gaps. Implications for applications of default rules in the law are discussed.

Suggested Citation

  • Marcin Isabel & Nicklisch Andreas, 2017. "Testing the Endowment Effect for Default Rules," Review of Law & Economics, De Gruyter, vol. 13(2), pages 1-27, July.
    • Handle: RePEc:bpj:rlecon:v:13:y:2017:i:2:p:27:n:9
    DOI: 10.1515/rle-2016-0010
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    References listed on IDEAS

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    More about this item

    Keywords

    default rules; endowment effect; lotteries;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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