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Endowment Effects within Corporate Agency Relationships

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  • Arlen, Jennifer
  • Spitzer, Matthew
  • Talley, Eric
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    Abstract

    Behavioral economics is an increasingly prominent field within corporate law scholarship. A particularly noteworthy behavioral bias is the "endowment effect"--the observed differential between an individual's willingness to pay to obtain an entitlement and her willingness to accept to part with one. Should endowment effects pervade corporate contexts, they would significantly complicate much common wisdom within business law, such as the presumed optimality of ex ante agreements. Existing research, however, does not adequately address the extent to which people manifest endowment effects within agency relationships. This article presents an experimental test for endowment effects for subjects situated in an agency relationship that typifies many firms. We find that subjects do not exhibit significant endowment effects. An additional experimental test suggests that this finding may be largely due to framing: subjects situated as "agents" may view entitlements principally in terms of exchange value, thereby dampening endowment. Copyright 2002 by the University of Chicago.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Legal Studies.

    Volume (Year): 31 (2002)
    Issue (Month): 1 (January)
    Pages: 1-37

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    Handle: RePEc:ucp:jlstud:v:31:y:2002:i:1:p:1-37

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    Web page: http://www.journals.uchicago.edu/JLS/

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    Cited by:
    1. Heifetz, Aviad & Segev, Ella & Talley, Eric, 2007. "Market design with endogenous preferences," Games and Economic Behavior, Elsevier, vol. 58(1), pages 121-153, January.
    2. Charles R. Plott & Kathryn Zeiler, 2005. "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review, American Economic Association, vol. 95(3), pages 530-545, June.
    3. Christoph Engel & Michael Kurschilgen, 2011. "The Coevolution of Behavior and Normative Expectations. Customary Law in the Lab," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2011_32, Max Planck Institute for Research on Collective Goods.
    4. Aviad Heifetz & Ella Segev & Eric Talley, . "Market Design with Endogenous Preferences," University of Southern California Legal Working Paper Series usclwps-1001, University of Southern California Law School.
    5. Steven Shavell, 2003. "Economic Analysis of Property Law," NBER Working Papers 9695, National Bureau of Economic Research, Inc.
    6. Christine Jolls & Cass R. Sunstein, 2005. "Debiasing through Law," NBER Working Papers 11738, National Bureau of Economic Research, Inc.
    7. Christoph Engel & Heike Hennig-Schmidt & Bernd Irlenbusch & Sebastian Kube, 2009. "On Probation. An Experimental Analysis," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_38, Max Planck Institute for Research on Collective Goods.
    8. Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.

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