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Welfare Economics with Intransitive Revealed Preferences: A Theory of the Endowment Effect


Economists use the standard rational model to predict behavior after a policy change and to determine the policy's welfare implications. Recent experimental observations are casting doubt on the predictive accuracy of the standard model, but the more realistic behavioral alternatives often provide a poor basis for making normative evaluations. This paper suggests that we can still predict behavior and measure welfare within the same model. We show that optimizing agents with standard preferences will in some cases behave as if they are subject to an endowment effect. Even so, we may still be able to uncover information about their preferences. Copyright 2006 Blackwell Publishing Inc..

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 8 (2006)
Issue (Month): 2 (05)
Pages: 193-218

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Handle: RePEc:bla:jpbect:v:8:y:2006:i:2:p:193-218
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  1. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
  2. R. Myerson., 2010. "Nash Equilibrium and the History of Economic Theory," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 6.
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  7. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
  8. Ian J. Bateman & Ian H. Langford & Alistair Munro & Chris Starmer & Robert Sugden, 2000. "Estimating Four Hicksian Welfare Measures for a Public Good: A Contingent Valuation Investigation," Land Economics, University of Wisconsin Press, vol. 76(3), pages 355-373.
  9. Leland, Jonathan W, 1994. "Generalized Similarity Judgments: An Alternative Explanation for Choice Anomalies," Journal of Risk and Uncertainty, Springer, vol. 9(2), pages 151-72, October.
  10. Franciosi, Robert & Kujal, Praveen & Michelitsch, Roland & Smith, Vernon & Deng, Gang, 1996. "Experimental tests of the endowment effect," Journal of Economic Behavior & Organization, Elsevier, vol. 30(2), pages 213-226, August.
  11. Loomes, Graham & Sugden, Robert, 1983. "A Rationale for Preference Reversal," American Economic Review, American Economic Association, vol. 73(3), pages 428-32, June.
  12. Shogren, Jason F. & Shin, Seung Youll & Hayes, Dermot J. & Kliebenstein, James, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," Staff General Research Papers 701, Iowa State University, Department of Economics.
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  15. Young H. P., 1993. "An Evolutionary Model of Bargaining," Journal of Economic Theory, Elsevier, vol. 59(1), pages 145-168, February.
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