Testing the Endowment Effect for Default Rules

Marcin Isabel () and Nicklisch Andreas ()
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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

Review of Law & Economics, 2017, vol. 13, issue 2, 27

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.

Keywords: default rules; endowment effect; lotteries (search for similar items in EconPapers)
JEL-codes: C91 K00 K12 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/rle-2016-0010

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