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A Test of Diminishing Marginal Value

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  • JOHN HOROWITZ
  • J. LIST
  • K. E. McCONNELL

Abstract

The notion of diminishing marginal value had a profound impact on the development of neoclassical theory. Early neoclassical scholars had difficulty convincing contemporaries of the new paradigm's value until political economists used the critical assumption of diminishing marginal value to link utility and demand. While diminishing marginal value remains a key component of modern economic intuition, there is little direct verification of this behavioural property. This paper reports experiments on a myriad of subject pools to examine behaviour in both price and exchange settings. We report results from nearly 900 subjects across 19 treatments and find strong evidence of diminishing marginal value. Copyright (c) The London School of Economics and Political Science 2007.

Suggested Citation

  • JOHN HOROWITZ & J. LIST & K. E. McCONNELL, 2007. "A Test of Diminishing Marginal Value," Economica, London School of Economics and Political Science, vol. 74(296), pages 650-663, November.
  • Handle: RePEc:bla:econom:v:74:y:2007:i:296:p:650-663
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    References listed on IDEAS

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    1. Samuelson, William & Zeckhauser, Richard, 1988. "Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
    2. Kagel,John H. & Battalio,Raymond C. & Green,Leonard, 2007. "Economic Choice Theory," Cambridge Books, Cambridge University Press, number 9780521035927, December.
    3. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    4. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, pages 1277-1284.
    5. Horowitz, John K & McConnell, K E & Quiggin, John, 1999. "A Test of Competing Explanations of Compensation Demanded," Economic Inquiry, Western Economic Association International, vol. 37(4), pages 637-646, October.
    6. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, pages 1426-1443.
    7. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, Oxford University Press, pages 41-71.
    8. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, pages 615-625.
    9. Horowitz, John K. & McConnell, K. E., 2000. "Values elicited from open-ended real experiments," Journal of Economic Behavior & Organization, Elsevier, pages 221-237.
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    Cited by:

    1. Oswald, Andrew J., 2008. "On the curvature of the reporting function from objective reality to subjective feelings," Economics Letters, Elsevier, pages 369-372.
    2. John K. Horowitz & Kenneth E. McConnell & James J. Murphy, 2013. "Behavioral foundations of environmental economics and valuation," Chapters,in: Handbook on Experimental Economics and the Environment, chapter 4, pages 115-156 Edward Elgar Publishing.
    3. Biel, Anders & Johansson-Stenman, Olof & Nilsson, Andreas, 2011. "The Willingness to Pay-Willingness to Accept Gap Revisited: The Role of Emotions and Moral Satisfaction," Working Papers in Economics 497, University of Gothenburg, Department of Economics.
    4. Biel, Anders & Johansson-Stenman, Olof & Nilsson, Andreas, 2011. "The willingness to pay–willingness to accept gap revisited: The role of emotions and moral satisfaction," Journal of Economic Psychology, Elsevier, pages 908-917.

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