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The endowment effect

Vernon Smith and Praveen Kujal ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The divergence between the willingness-to-pay (WTP) and willingness-to-accept (WTA) has resulted in two explanations. First, that this may be due to the manifestation of the endowment effect (Kahneman, Knetsch and Thaler, 1991). Second, the difference between WTA and WTP is directly related with the substitutability of the goods (Haneman, 1991). In this paper we show that one can observe undertrading in markets even if the WTA-WTP discrepancy is negligible. Due to underrevelation of intramarginal units very flat reported inverse supply and demand curves are obtained. As a result very small deviations in reported WTA and WTP can lead to undertrading.

New Economics Papers: this item is included in nep-cbe and nep-exp
Date: 2003-11
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Chapter: The Endowment Effect (2008) Downloads
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