The Endowment Effect and the Coase Theorem

Stephanie Jacques

American Journal of Agricultural Economics, 1992, vol. 74, issue 5, 1316-1323

Abstract: The Coase theorem prediction that the final allocation of resources will be independent of the liability rule relies on one important assumption: an individual will value a right or an asset the same whether considering its acquisition or its loss (MWP maximum willingness to pay should equal MCA minimum compensation to accept). However, the marginal rate of substitution between one good and another seems to be affected by a phenomenon described as the endowment effect. In such a case, the individual who is assigned the property right is more likely to retain it and the Coase theorem does not hold anymore.

Date: 1992
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