The Endowment Effect and the Origin of Private Property

Abstract

Experimental studies have shown that subjects exhibit a systematic endowment effect. Since there is no plausible cultural norm fostering the endowment effect, the behaviour likely involves a genetic predisposition, and hence may well be the product of some evolutionary adaptation. If this is correct, the bulk of human evolution occurred before the appearance of institutions protecting property rights, so bargaining over the exchange of property rights cannot explain the endowment effect. This chapter shows that the endowment effect can be modelled as respect for private property without legal institutions ensuring third-party contract enforcement. In this sense, pre-institutional ‘natural’ private property has been observed in many species, in the form of the recognition of territorial possession. We develop a model loosely based on the Hawk, Dove, Bourgeois game and the War of Attrition to explain the natural evolution of private property.KeywordsPrivate PropertyInstitutional ChangeEconomic BehaviourLoss AversionProperty EquilibriumThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.