The Endowment Effect in a Public Goods Experiment

Abstract

The endowment effect suggests that consumer preferences are reference-dependent; i.e., that the shapes of indifference curves depend on an agent’s initial endowment and the direction of exchange offers. Hence, a person may value a good more highly once ownership is established, causing disparity between willingness to accept and willingness to pay value measures. In this paper we test for the endowment effect in a manner that does not rely on observing value disparities. We employ a one shot voluntary contribution mechanism (VCM) with treatments for account framing, duration effects, and the physical handling of the initial endowment. The treatments are designed to vary subjects’ perceived ownership over their experiment endowments. Results generally fail to support reference-dependence in manners suggested by the endowment effect. Contribution rates are higher when initial endowments begin in subjects’ private accounts compared to when originating in the shared public account. Contributions are no different when subjects hold their endowments for up to one week. And contributions are higher among subjects who physically handle cash compared to those indicating their decisions in writing.