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Testing the Endowment Effect for Default Rules

Author

Listed:
  • Isabel Marcin

    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Andreas Nicklisch

    (University of Hamburg, School of Business, Economics and Social Science & Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This paper explores potential endowment effects of contractual default rules. For this purpose, we analyze the Hadley liability default clause in a model of bilateral bargaining of lotteries against safe options. The liability default clause determines the right for the safe payoff option. We test the model in series of laboratory experiments. The results reveal a substantial willingness-to-accept to willingness-to-pay gap for the right to change lotteries against safe options. Even if we apply the incentive compatible Becker-DeGroot-Marschak value elicitation mechanism, there is a significant gap indicating a robust endowment effect caused by default rules. Differences of expected values of the lotteries and the safe options consistently decrease the gaps. Implications for applications of default rules in the law are discussed.

Suggested Citation

  • Isabel Marcin & Andreas Nicklisch, 2014. "Testing the Endowment Effect for Default Rules," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2014_01, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2014_01
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    More about this item

    Keywords

    lotteries; Default rules; Endowment effect;
    All these keywords.

    JEL classification:

    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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