The Endowment Effect
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.
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- 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.
- Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994.
"Resolving Differences in Willingness to Pay and Willingness to Accept,"
American Economic Review,
American Economic Association, vol. 84(1), pages 255-70, March.
- 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.
- Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
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