Wrestling with the Endowment Effect, or How to Do Law and Economics Without the Coase Theorem

Abstract

This chapter, written for the forthcoming Oxford Handbook of Behavioral Economics and the Law, describes the endowment effect, with attention not only to what we know about it, but also what remains unclear about both its scope and its underlying causal mechanism, and demonstrates the importance of the effect to the normative analysis of a wide-range of substantive legal issues.Part I presents the core empirical findings concerning the endowment effect and critically evaluates recent claims that the effect might be an artifact of poor experimental design. Part II evaluates the evidence for several highly-contested interpretations of what psychological process or processes cause the endowment effect. Part III considers examining how the endowment effect might bear on positive and normative issues in four broad categories of law: the initial assignment of entitlements, the potential reassignment of entitlements, the facilitation of private transfers of entitlements, and the protection of entitlements through the judicial system. This part demonstrates that, used cautiously and judiciously, evidence of the endowment effect has the potential to sharpen normative legal policy analysis, but also that this enterprise is complicated and fraught with peril.