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Testing the initial endowment effect in experimental auctions

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  • Maria L. Loureiro
  • Wendy J. Umberger
  • Susan Hine

Abstract

In experimental auctions, participants are usually given an initial endowment or cash compensation that will cover the costs associated with their bids in the experiment as well as their participation time. This study analyses participants' bids in a randomly binding second-price auction to test the effect of the initial endowment on participants' willingness-to-pay estimates. Three different endowments: $2, $4, and $6 are used to compensate participants in an experimental auction. It is found that participants receiving $4 or $6 as an initial endowment, bid statistically higher than those receiving only $2. Thus, willingness-to-pay estimates are sensitive to the initial endowment. Based on the results obtained in this experiment, it is concluded that endowments that are closer to the value of the auctioned good may be a more appropriate way to compensate auction participants in order to reveal their true willingness to pay for a private good, and to reduce overbidding. Additionally, the findings illustrate that an initial compensation closer to the participants' value of time may inflate their bids, and consequently may not be a correct compensation mechanism to elicit true willingness-to-pay for private goods. New ways of compensating participants in experimental auctions should be investigated.

Suggested Citation

  • Maria L. Loureiro & Wendy J. Umberger & Susan Hine, 2003. "Testing the initial endowment effect in experimental auctions," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 271-275, April.
    • Handle: RePEc:taf:apeclt:v:10:y:2003:i:5:p:271-275
    DOI: 10.1080/1350485032000056855
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    11. Demont, Matty & Rutsaert, Pieter & Ndour, Maimouna & Verbeke, Wim & Seck, Papa Abdoulaye & Tollens, Eric, 2012. "Experimental auctions, collective induction and choice shift: Willingness-to-pay for rice quality in Senegal," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126861, International Association of Agricultural Economists.
    12. Murat Isik, 2006. "An experimental analysis of impacts of uncertainty and irreversibility on willingness-to-pay," Applied Economics Letters, Taylor & Francis Journals, vol. 13(2), pages 67-72.
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    16. Yu Yvette Zhang & Rodolfo M Nayga Jr. & Dinah Pura T Depositario, 2019. "Learning and the possibility of losing own money reduce overbidding: Delayed payment in experimental auctions," PLOS ONE, Public Library of Science, vol. 14(5), pages 1-19, May.
    17. Adewale Oparinde & Abhijit Banerji & Ekin Birol & Paul Ilona, 2016. "Information and consumer willingness to pay for biofortified yellow cassava: evidence from experimental auctions in Nigeria," Agricultural Economics, International Association of Agricultural Economists, vol. 47(2), pages 215-233, March.
    18. Kalyn T. Coatney & Dale J. Menkhaus & Sherrill Shaffer, 2014. "Impacts of a Capacity Advantaged Bidder in Sequential Common Value Auctions: Evidence from the Laboratory," CAMA Working Papers 2014-17, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    19. Akoa Etoa, Josephine Mireille & Ndindeng, Sali Atanga & Owusu, Eric Sarpong & Woin, Noe & Bindzi, Boniface & Demont, Matty, 2016. "Consumer valuation of an improved rice parboiling technology: Experimental evidence from Cameroon," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 11(1), pages 1-24, March.
    20. Simons, Andrew M. & Ahmed, Milkiyas & Blalock, Garrick & Nesin, Bourcard, 2023. "Indigenous bone fertilizer for growth and food security: A local solution to a global challenge," Food Policy, Elsevier, vol. 114(C).
    21. David M.A. Murphy & Dries Roobroeck & David R. Lee & Janice Thies, 2020. "Underground Knowledge: Estimating the Impacts of Soil Information Transfers Through Experimental Auctions†," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(5), pages 1468-1493, October.
    22. Demont, Matty & Rutsaert, Pieter & Ndour, Maimouna & Verbeke, Wim, 2013. "Reversing Urban Bias in African Rice Markets: Evidence from Senegal," World Development, Elsevier, vol. 45(C), pages 63-74.
    23. Oparinde, Adewale & Birol, Ekin & Murekezi, Abdoul & Katsvairo, Lister & Diressie, Michael & Nkundimana, Jean & Butare, Louis, 2015. "Consumer Acceptance of Biofortified Iron Beans in Rural Rwanda: Experimental Evidence," 2015 Conference, August 9-14, 2015, Milan, Italy 211353, International Association of Agricultural Economists.
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