Endowment Effect Research Articles

A Semi-Parametric Approach to the Oaxaca-Blinder Decomposition With Continuous Group Variable and Self-Selection

This paper describes the application of a semiparametric approach, known as a varying coefficients model (Hastie and Tibshirani 1993), to implement a Oaxaca-Blinder type of decomposition in the presence of self-selection into treatment groups for a continuum of comparison groups. The flexibility of this methodology may allow for detecting heterogeneity of the role of endowment and coefficient effects when analyzing endogenous dose treatments. The methodology is then used to revisit the impact of obesity on wages (Cawley 2004), using body mass index (BMI) as the continuous group variable. The results suggest that body weight does have a negative impact on wages for white women, but the impact decreases for higher BMI levels. For white men, the impact is also negative and significant, but positive for low levels of BMI, which explains why they are not significant in the linear instrumental variables approach.

Behavioral Economics and the Value of a Statistical Life

There are many possible connections between VSL and behavioral economics. A list of topics includes endowment effects, risk salience, ambiguity aversion, present bias, reference groups, reference points, and experienced versus decision utilities. There are also nudges that connect to estimating or using VSL in government decisions and cousins of behavioral economic research including interpersonal heterogeneity, experiments, neuroeconomics, and beauty or personal attractiveness. Current evidence suggests that VSL and behavioral economics best connect via (1) possible multi-attribute reference group effects and (2) a possible distinction between decision utility and experienced utility.

Quantitative Analysis of Endowment Effect on Cars

Quantitative Analysis of Endowment Effect on Cars

The extended self, product valuation, and the endowment effect

Various explanations have been proposed to account for discrepancies in product valuation, pertaining particularly to the buyer-seller valuation gap called the endowment effect. Previous research has examined the roles of loss sensitivity, strategic responding, differences between buyers and sellers in information processing, self-enhancement, and psychological ownership as causes of the endowment effect. This article presents a conceptual perspective based on the theory of the extended self that integrates previously proposed mechanisms for the endowment effect. The self-extension perspective generates novel predictions about possible moderators of the endowment effect. Further, the self-extension perspective also raises questions for product valuation in general. By integrating previous research and posing new questions, the self-extension perspective provides a new base for the advancement of research on product valuation.

Closing the Gender Gap in Corporate Advancement: Insights and Solutions from Behavioural Economics

Despite evidence that both gender and ethnically diverse leadership is good for businesses’ bottom line, just one in five senior North American business leaders is female, one in thirty a woman of colour. Little literature exists applying behavioural economics [BE] concepts to explain gender gaps. Yet, as demonstrated by the 2010 UK Conservative-Liberal Democrats coalition government, the Obama government in the US and Trudeau government in Canada, lawmakers, policymakers and business leaders are interested in BE’s persuasive power to influence behaviour. My contribution exploits this interest, builds on the excellent existing scholarship analyzing gender gap concepts from a BE perspective, and fills this gap. Applying concepts of bounded rationality, bounded willpower, bounded self-interest, and the endowment effect to 2017’s North American-focused Women in the Workplace report (Report) published by LeanIn and McKinsey, a vast study examining HR practices and pipeline data of 222 companies employing 12 million+ people and surveying 70,000+ employees’ experiences, I find that hiring and promotion decisions are affected by the three bounds and endowment effect, undercutting businesses’ compelling economic interest in diverse leadership. BE offers solutions to tackle biased behaviour and shows how gender gap scholars’ and the Report’s recommendations can be taken further to close the gender gap in advancement. I argue that normative best practice adoption by business and nudges and tax incentives from governments, ideally in combination, can spur businesses to adopt debiasing behaviours and practices that will contribute to closing the gender gap in advancement. Enabling women to achieve their full leadership and economic potential will enhance women’s wellbeing, improve businesses’ performance, and lead to greater social equity.

The Impact of the Endowment Effect on the Law and Economics of Product Return Regulations

The proliferation of product returns entails substantial financial and environmental costs. Nonetheless, regulators typically restrict firms from charging high fees from consumers who return products, thereby facilitating product returns. To analyze the consequences of such interventions, we consider a market in which consumers have private information on their expected consumption utility. We show that monopolistic sellers have an incentive to trigger inefficiently many returns even without regulation, as low return fees enable them to screen consumers and reap their surplus. Regulators then face a trade-off: upper bounds on return fees exacerbate the inefficiency by causing the seller to trigger even more returns, but also lead to a redistribution of wealth from monopolistic sellers to consumers. This trade-off also arises when consumers have an endowment effect. However, if sellers can induce overoptimistic beliefs about the utility from consumption (e.g. through advertisements), then upper bounds on return fees may also lead to higher social welfare.

Exchange asymmetries in productive assets: Tools, fertilizer or cash?

Abstract Exchange asymmetries in individual decision-making have attracted substantial attention from economists since Thaler (1980) referred to the phenomenon that losses are weighted more heavily than gains as an “endowment effect” and related it to loss aversion and prospect theory. We used a field experiment to investigate exchange asymmetries in productive assets among poor rural respondents in Ethiopia. Farmers were randomly allocated two types of productive assets (tool or fertilizer) or cash, with a choice to keep the productive asset (cash) or exchange it for cash (productive asset). Loss aversion was proxied with a separate experiment and was used to assess the importance of endowment effect theory to explain exchange asymmetries. Our study finds a significant exchange asymmetry and a greater exchange asymmetry for the more popular tool than for fertilizer. Loss aversion could explain a small but significant part of the exchange asymmetry in tools, but trade experience did not reduce the exchange asymmetry. The findings are relevant for whether to use targeted in-kind or cash transfers to stimulate technology adoption and enhance food security among poor rural households. The results imply that in-kind transfers may stimulate input use or investments more than cash transfers.

The endowment effect on entrepreneurs: A risky attachment

espanolResumen: Este documento presenta evidencia acerca del papel del efecto de dotacion en el comportamiento de riesgo de los emprendedores, y como el potencial de perder sus empresas los lleva a asumir mayores riesgos. Este estudio utiliza un diseno experimental con 466 emprendedores en Cali, Colombia. Los resultados muestran que los emprendedores son mas propensos a aceptar apuestas mas arriesgadas cuando estas estan relacionadas con la posesion de sus companias, que en loterias no enmarcadas en este contexto. Los datos muestran que la existencia del efecto de dotacion aumenta el equivalente de certeza de una loteria, para el emprendedor medio, en 36,5%. Esto podria explicar por que muchos empresarios prefieren continuar operando sus empresas de bajo rendimiento, y tambien por que muchos emprendedores sobrevaloran sus empresas durante los procesos de inversion. Este documento presenta una vision alternativa respecto de los factores detras del comportamiento de riesgo de los emprendedores, y abre la puerta a futuras investigaciones del papel de los sesgos en los procesos de toma de decisiones empresariales. EnglishAbstract: This paper presents evidence on the role of the endowment effect in shaping the risk-taking behavior of entrepreneurs, and how the potential of losing their firms lead them to take higher risks. This study uses an experimental design with 466 entrepreneurs in Cali, Colombia. Results show that entrepreneurs are more likely to accept riskier bets when those are related to the possession of their companies than in non-framed lotteries. The data shows that the existence of the endowment effect increases the certainty equivalent of a lottery, for the median entrepreneur, by 36.5%. This could explain why many entrepreneurs prefer to continue operating their underperforming firms, as well as why many entrepreneurs overvalue their firms during investment processes. This paper presents an alternate view on the drivers behind entrepreneurs’ risk-taking behavior and opens a door for future research on the role of biases on entrepreneurs’ decision-making processes.

Relations between risk attitudes, culture and the endowment effect

Abstract The main purpose of this research was to examine whether systematic cross-national differences existed in risk preferences. As a part of the survey, it was also tested how the subjects decided on behalf of their friends. Considering the type of risk-taking and the role of endowment plus relevant cultural backgrounds, the answerers were grouped, and each segment could be identified. Finally, this segmentation could be correlated with behaviour in risk decisions. Here, the Allais situation was used testing respondent behaviour in risky decision-making on behalf of others. This paper used the validated DOSPERT Scale, measuring risk perceptions and risk preferences of international students (n=244). The used survey contained different risk attitudes depending on decision making and involved the following criteria: Ethical, Financial, Health or Safety, Recreational, and Social Risks. Applying the DOSPERT Scale, differences were also found between ‘Risk-Taking’, ‘Risk-Perceptions’, and ‘Expected Benefits’. This result can be explained by different risk attitudes particular to people making decisions involving measured risks. At the same time, thanks to the worldwide sample, this paper focused on cultural differences and observed the impact of different cultural backgrounds on risk-taking. Comparing personal traits with Hofstede’s cultural UAI (Uncertainty Avoidance Index) helped us understand deeper cultural influences. The sample was widely heterogeneous, which led to some changes in the original research question and provided a new method in the conceptual model. Based on the state of the art, a conceptual model was deduced, three hypotheses were tested, and three various segments were identified regarding the personal DOSPERT (Domain-Specific Risk-Taking Scale) Risk Preferences. In the second part of the paper, Personal Risk Preferences were connected and tested not only using the national culture background but also attitudes towards the endowment. Although there was no significant correlation between the distribution of risk perception, the styles of each role might show how the cultural heritage impacts various decisions and risk levels.

Wage Gap and Employment Status in Indian Labour Market: Quantile Based Counterfactual Analysis

This study examines the extent of wage gap between workers in permanent and temporary jobs but in roughly similar occupation types by evaluating the impact of workers’ characteristics and education. The differential effects of the covariates on wage gap at different locations of the wage distribution are estimated by applying quantile regression model. After estimating the differential effects the relevance of glass ceiling or sticky floor hypothesis has been tested with Indian data. The wage gap between temporary and permanent employment is decomposed into endowment effect based on the difference in labour market characteristics and coefficient effect based on the difference in returns for the same characteristics. The study observes that the wage gap between temporary and permanent workers is wider at the upper tail of the distribution not rejecting the glass ceiling hypothesis. The decomposition analysis suggests that the wage gap presents in the Indian labour market primarily because of discrimination measured by the coefficients effects.

Interprovincial differences in labour force distribution and utilization based on educational attainment in Indonesia, 2002–2015

AbstractIntroducing an employment variable with five levels of educational attainment per capita and employing inequality decomposition, this study addresses three questions. How does labour force vary by education and provinces? How does labour force utilization vary by education and provinces? What are the potential causes of differences? We find that the no‐primary‐education group is more endowed in less‐developed provinces and allocated most unequally among education groups across provinces, despite past universal primary education policies. The senior‐secondary‐education group with the largest labour share is a growing concern due to the lower employment rate and largest interprovincial inequality.

Will “no-ownership” work for apparel?: Implications for apparel retailers

Collaborative consumption (CC) has significantly changed the way people consume resources from everyday goods to non-product assets. However, despite the rapid growth of CC, adoption has been slow in regards to apparel. Based on the endowment effect claiming that simply owning a good can enhance its perceived worth, this study proposes two deterrents of CC adoption including a sense of ownership and possession-self association, and hypothesizes that these constructs positively affect perceived risk of CC, which in turn impedes adoption intention of CC. Two additional moderators (consumers’ involvement with apparel products, consumers’ emotional attachment to apparel) in the relationship between possession-self bond and perceived risk were also suggested. An online self-administered survey was administered to 1,841 US respondents to test a research model including four different CC modes for apparel, finding support for the endowment effect as a potential barrier to consumer adoption of CC when ownership is removed. Specific managerial implications for CC retailers are provided.

Decomposing public support for energy policy: What drives acceptance of and intentions to protest against renewable energy expansion in Germany?

Based on data from a large-scale survey (n=3400) conducted in Germany, we analyze citizens’ acceptance and protest intentions regarding the construction of new power plants for renewable energy production. We differentiate between wind energy, solar energy, and biomass energy; natural gas is used as a reference category. We measure protest intentions and acceptance regarding the construction of new power plants within a 10-kilometer radius of respondents’ place of residence. Protest and acceptance are explained by several competing theoretical determinants such as specific attitudes towards each energy source, general attitudes towards climate change, social norms, the “not-in-my-backyard” phenomenon, place attachment, and conditional cooperation. We use decomposition models used in labor market research to study endowment, discrimination, and characteristics effects related to different attitudinal dimensions and their influence on acceptance and protest intentions. Our results show more positive attitudes, less protest intentions, and a stronger acceptance of solar energy, followed by wind energy, biomass energy, and natural gas. Theory comparison reveals, for instance, that “not-in-my-backyard” beliefs have high explanatory power, climate change concern is only relevant for the acceptance of wind energy and solar energy, and place attachment seems to be a useful concept for explaining protest intentions. The decomposition models indicate that attitudes are strong determinants of acceptance and protest intentions where, in addition to endowment effects, we also find some indications of discrimination effects (i.e., different weights of attitudinal dimensions) and characteristics effects (i.e., effects of respondents’ characteristics). Finally, we discuss the policy implications of these results.

Endowment Effect: Trading for Oneself Versus Trading for Others

Prior research on the endowment effect has tended to focus on decisions made by individuals acting on their own account rather than on others’ behalf. This article reports on three experiments that modeled this “for-self” versus “for-others” distinction and measured its effects on prices. Specifically, our participants who were asked to make trading decisions for other people subsequently reported decreases in the endowment effect. We concluded that, in the context of the trading of goods, perceived ownership and differences in focus on the traded products’ positive and negative features mediated the diminished endowment effect our experiments identified.

The value of souvenirs: Endowment effect and religion

Souvenir purchases has emerged as an important area of research in tourism studies. We investigate tourists’ attachment to souvenirs based on religion, type, and place of purchase, and analyze the endowment effect. We asked 3325 Jewish and Christian tourists visiting Israel to estimate the price they would pay/accept for three types of souvenir: Jewish, Christian, and general souvenirs. Overall, we found an endowment effect toward most of the souvenirs. The results demonstrated that religion, type, and place of purchase affected the valuation of the items. The endowment effect was higher for the Jewish group than for their non-Jewish counterparts. These results demonstrate that tourists’ perceptions of souvenirs are shaped not only by their utility, but also by their meaningfulness.

Increasing China's Agricultural Labor Productivity: Comparison and Policy Implications from Major Agrarian Countries

China's low agricultural labor productivity has become the key weakness of its agricultural competitiveness and sustainable development, and strategies for improving China's agricultural labor productivity lack clear and consistent theory and empirical support. To address this issue, the current study uses the methods of convergence index, correlation coefficient, and nonparametric test, to analyze the characteristics and influencing factors of agricultural labor productivity among 32 major agrarian countries during 1961–2013. This analysis shows that the development gap among countries has been narrowing. The USA takes the leading position among all the countries, while some countries with scarce land like Japan have succeeded in achieving transcendence, and other countries like India have experienced relatively slow speed. The agricultural labor productivity is significantly driven by agricultural labor surplus, agricultural product processing, and agricultural industrial structure. The effects of land resource endowment, agricultural mechanization, and biochemical inputs have been declining and in some cases are no longer even significant. It is therefore necessary to shift attention to marketization, diversification, and high quality, instead of the former focus on agricultural intensification, concentration and large-scale operations, and this shift is probably more closely aligned with current practices. There are more people and less land in China, and the agricultural labor force in China still accounts for nearly 30% of the total population. Considering these national conditions, it is very important to simultaneously improve the efficiency of agricultural production of small farmers and promote the successful urbanization of the agricultural labor force. In the medium and long term, it is imperative to improve the competitiveness of Chinese agriculture by adopting related policy arrangements such as induced agricultural technological innovation, production factor substitution, and multifunctional agriculture development.

The role of labor endowments on industry output in the short run: Evidence from U.S industries

This paper investigates the effect of changing factor endowments on industry output using an extended version of specific factors model with skilled and unskilled labor as mobile factors. The theoretical model is calibrated with a parametric estimation of substitution elasticities of factor inputs in 29 US Industries. We show that output declines in some industries when skilled or unskilled labor endowment increases, a result that challenges findings of the standard specific factors model as well as the Rybczynski pattern with one type of labor. Our theoretical framework demonstrates that it is essential to allow for multiple mobile factors to analyze changes in output in the short run. We offer fully accurate predictions on the change of industry output in industries in which specific capital is substitute with one type of labor and complement with the other type.

Differences in entrepreneurial intentions of Chinese college students: evidence from an Oaxaca–Blinder decomposition

China has been characterized by sharp regional differences in quality of higher education. Using the data from a field survey on the entrepreneurial intentions of Chinese college students, this work adopts the Oaxaca–Blinder decomposition method to assess the extent and the determinants of the disparity of entrepreneurial intentions of college students from rural and urban areas. The analysis shows that both endowment and coefficient effects contribute to the rural–urban gap in entrepreneurial intentions of college students. This suggests that, though the different entrepreneurial intentions are mainly the result of the different personal qualities, more profound works are required to encourage the entrepreneurial intentions of college students from rural and urban areas.

Sunk ‘Decision Points’: a theory of the endowment effect and present bias

This paper presents a very simple model in which situational cues associated with a particular consumption good compel an agent—who may have otherwise been “thinking about” something else—to consider the decision to consume that good. Within this framework, it is shown how an endowment effect and a present bias can arise through a common mechanism. The analysis points to a novel, contributing role for inattention (of a particular form) in understanding both of these behavioral anomalies while also speaking to evidence that they are often cue-induced.

Racial and Ethnic Disparities in Homeownership

There are persistent differences in homeownership rates across racial and ethnic groups. Homeownership rates for whites are over 20 percentage points higher than for blacks or Hispanics. This paper uses a model of the housing tenure decision to gain a better understanding of these racial and ethnic differentials in homeownership and employs a decomposition technique that has been applied to labor market discrimination to report the results of the empirical testing of two hypotheses; (1) race (ethnicity) influences the probability of ownership through differences in household endowments (income, education, age, gender, and family type) and market endowments (price and location); and (2) race (ethnicity) directly influences the probability of ownership through racial or ethnic discrimination and other factors that may be correlated with race or ethnicity. We find endowment effects important in explaining the persistent racial and ethnic disparities in homeownership. In brief, logit analysis of 1989 American Housing Survey (AHS) national sample data reveals that 81 percent (78 percent) of the differences between the predicted probability of ownership between black and white households (Hispanic/non-Hispanic) are due to differences in group endowments. Direct effects explain 19 percent of the black-white differentials and 22 percent of the Hispanic/non-Hispanic differentials. Because the direct effects are modeled as residual differences, it must be realized that the residual components could also be capturing the influence of important omitted or harder to measure variables internal to the market process and correlated with race or ethnicity. These include wealth, household location, employment history, credit history, and cultural predisposition toward homeownership.