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What Endowment Effect A Public Good Experiment

The Endowment Effect. Individuals with loss aversion or status quo bias may value a resource more highly once the property right is established.Seminal cite: Thaler 1980 JEBO. Evidence of the Endowment Effect. Traditionally tested using CVM or lab/market auctions, showing WTA > WTP Knetsch 1989 A

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What Endowment Effect A Public Good Experiment

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    1. What Endowment Effect? A Public Good Experiment Edward J. López Assistant Professor Department of Economics University of North Texas elopez@unt.edu William Robert Nelson, Jr. Assistant Professor School of Management University at Buffalo wrnelson@buffalo.edu

    2. The Endowment Effect Individuals with loss aversion or status quo bias may value a resource more highly once the property right is established. Seminal cite: Thaler 1980 JEBO

    3. Evidence of the Endowment Effect Traditionally tested using CVM or lab/market auctions, showing WTA > WTP Knetsch 1989 AER Kahnemann, Knetsch and Thaler 1991 JEP

    4. Endowment Effect as Anomaly Modeled as some manipulation (pivot/kink/rotation) of standard indifference curves at point of initial endowment Morrison 1997 AER Implies possibly intersecting indifference curves Kahnemann, Knetsch and Thaler 1991 JEP

    5. Value Disparities Commonly observed Smaller for more substitutable goods Hanemann 1991, 2003 AER (theory) Shogren et al. 1994 AER (evidence) Diminish with market discipline and market experience Shogren et al. 1994, 1997 AER (lab auction evidence) List 2003 QJE (field auction evidence)

    6. Endowment vs. Substitution Controversy has recently centered on what explains observed value disparities Endowment and Substitution alternative explanations not necessarily mutually exclusive not necessarily mutually inclusive

    7. Summarizing the Literature Some degree of value disparity is commonly observed Endowment and Substitution are alternative explanations Market experience and discipline tend to reduce value disparities EE is some pivot/kink/rotation of indifference curves at point of endowment

    8. Our contribution The question of whether value disparities are preference-based (i.e., fundamental) remains. Are preferences anomalous yet constrained in the usual manner by market institutions? There may be value in testing for the presence of an endowment effect in a non-market situation that controls for the substitution effect as a viable alternative explanation.

    9. Use a Public Good Game (VCM) Our design allows us simultaneously to: Eliminate market discipline (uses public good) Eliminate market experience (one shot) Control for substitution effects (cash based) Observe treatments that one would expect to elicit the endowment effect (account and duration framing)

    10. The Experiment 2 person public good game (VCM) MPCR=0.75 Each participant given $10 endowment Each participant makes one decision Number of dollars to contribute to public account Two types of treatment variation

    11. Treatment Variation 1 Account Framing (AF) Private Group: told money starts in private account Property right is established Resembles WTA decision Public Group: told money starts in public account Initial endowment is shared Resembles WTP decision

    12. Treatment Variation 2 Duration Framing Long Group: holds money for some time before making contribution decision Short Group: makes decision immediately Laboratory treatments Short: holds cash for 1 minute Long: holds cash for 25 minutes Classroom treatments Short-hold cash for 1 minute Long-hold cash for 1 week

    13. Why an Effect in AF? Originating account is initial property right Focal point for prospective reciprocators to reach fairness equilibrium Shelling 1960; Rabin 1993 AER Warm glow and cold prickle might differ in magnitude Andreoni 1995 QJE

    14. Why an Effect in DF? Temporal component—EE may take time to bind Knetch and Sinden 1984 QJE Kahneman, Knetch and Thaler 1991 JEP More readily part with windfall gains than earned wealth Thaler and Johnson 1991 PIH Friedman 1957

    15. Hypotheses H1: AF imparts an endowment effect Private group contributions less than Public group money will tend to stay where it is said to start H2: More time holding the endowment increases strength of endowment effect Long group contributions less than Short group

    16. Results Overview 284 undergraduate participants From U. at Buffalo and U. of North Texas No difference in responses that affect tests The mean contributions classroom treatments: 4.72 laboratory treatments: 4.61

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