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The Endowment Effect

In: Handbook of Experimental Economics Results

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  • Kujal, Praveen
  • Smith, Vernon L.

Abstract

The divergence between the willingness-to-pay (WTP) and willingness-to-accept (WTA) has resulted in two explanations. First, that this may be due to the manifestation of the endowment effect (Kahneman, Knetsch and Thaler, 1991). Second, the difference between WTA and WTP is directly related with the substitutability of the goods (Haneman, 1991). In this paper we show that one can observe undertrading in markets even if the WTA-WTP discrepancy is negligible. Due to underrevelation of intramarginal units very flat reported inverse supply and demand curves are obtained. As a result very small deviations in reported WTA and WTP can lead to undertrading.
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Suggested Citation

  • Kujal, Praveen & Smith, Vernon L., 2008. "The Endowment Effect," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 101, pages 949-955, Elsevier.
    • Handle: RePEc:eee:expchp:7-101
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    References listed on IDEAS

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    1. Franciosi, Robert & Kujal, Praveen & Michelitsch, Roland & Smith, Vernon & Deng, Gang, 1996. "Experimental tests of the endowment effect," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 213-226, August.
    2. Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," American Economic Review, American Economic Association, vol. 84(1), pages 255-270, March.
    3. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-647, June.
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    Cited by:

    1. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference‐Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.
    2. Diego Salzman, 2013. "Behavioural Real Estate," ERES eres2013_334, European Real Estate Society (ERES).
    3. Amitai Etzioni, 2011. "Behavioural Economics: Next Steps," Journal of Consumer Policy, Springer, vol. 34(3), pages 277-287, September.
    4. Roth, Gerrit, 2006. "Predicting the Gap between Willingness to Accept and Willingness to Pay," Munich Dissertations in Economics 4901, University of Munich, Department of Economics.

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