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A Computational Theory of Exchange: Willingness to pay, willingness to accept and the endowment effect

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  • Lunn, Pete
  • Lunn, Mary

Abstract

We present a theory of exchange that provides an alternative explanation for the endowment effect. Unlike standard neoclassical theories and Prospect Theory, our approach is not based on preference structure, but on adaptive responses to the problem of exchange when value is uncertain. We combine assumptions from perceptual and economic theory into a highly generalised model. Agents who maximise surplus but perceive uncertainty in the value of goods, set willingness to accept (WTA) above willingness to pay (WTP). The disparity increases with the perceived uncertainty of value. We show also how feedback over repeated exchanges may have heuristic value in learning to set optimal WTA and WTP. Our model receives some support from empirical studies of exchange.

Suggested Citation

  • Lunn, Pete & Lunn, Mary, 2009. "A Computational Theory of Exchange: Willingness to pay, willingness to accept and the endowment effect," Papers WP327, Economic and Social Research Institute (ESRI).
    • Handle: RePEc:esr:wpaper:wp327
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    File URL: https://www.esri.ie/pubs/WP327.pdf
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    Cited by:

    1. Lunn, Pete & Duffy, David, 2010. "The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover," Papers WP338, Economic and Social Research Institute (ESRI).

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    Keywords

    exchange/uncertainty/willingness to accept/willingness to pay;

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