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Endowment effect theory and the Samuelson solution – a thought experiment

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  • Bischoff, Ivo

Abstract

Thaler (1980) employs prospect theory to explain the endowment effect, i.e. the empirically observed disparity between the willingness to pay for a certain good (WTP) and the willingness to accept retribution payments in exchange for giving up this good (WTA). This disparity is caused either by the disutility from parting with one?s endowment and/or by an extra utility from ownership which is not anticipated by individuals who are not endowed with the good. These effects may not apply to public goods because consumers are not given exclusive property rights. The graphical tools introduced by Samuelson (1954) are applied to show how these effects influence the allocation of resources among private and public goods. An inefficient allocation only occurs if the ownership utility effect applies to one good but not to the other.

Suggested Citation

  • Bischoff, Ivo, 2006. "Endowment effect theory and the Samuelson solution – a thought experiment," Finanzwissenschaftliche Arbeitspapiere 76, Justus Liebig University Giessen, Fachbereich Wirtschaftswissenschaften.
    • Handle: RePEc:zbw:jlufwa:76
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    References listed on IDEAS

    as
    1. Van Boven, Leaf & Loewenstein, George & Dunning, David, 2003. "Mispredicting the endowment effect:: Underestimation of owners' selling prices by buyer's agents," Journal of Economic Behavior & Organization, Elsevier, vol. 51(3), pages 351-365, July.
    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.
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    More about this item

    Keywords

    endowment effect; loss aversion; public goods; efficiency; Samuelson solution;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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