A Test of Competing Explanations of Compensation Demanded

John Horowitz (), Kenneth McConnell () and John Quiggin

Economic Inquiry, 1999, vol. 37, issue 4, 637-46

Abstract: We find that prospect theory behaviour is significantly more prevalent than utility theory behavior in experiments involving multiple, real items. In the experiments, subjects were endowed with three items and asked the minimum payments they required to be willing to return one, two, or three of them. Our key observation is that prospect theory implies concavity of compensation demanded, whereas utility theory implies convexity. We examine whether the compensation demanded is convex or concave in the number of items returned. Copyright 1999 by Oxford University Press.

Date: 1999
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