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Review of Law & Economics

Editor-in-Chief: Parisi, Francesco

Ed. by Cooter, Robert D. / Gómez Pomar, Fernando / Kornhauser, Lewis A. / Parchomovsky, Gideon / Engel, Christoph

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1555-5879
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Volume 13, Issue 2 (Feb 2017)

Issues

Testing the Endowment Effect for Default Rules

Isabel Marcin / Andreas Nicklisch
  • Corresponding author
  • HTW Chur, Center for Economic Policy Research, and German Research Foundation, Research Group FOR 2104 “Needs-Based Justice and Distribution Procedures”, Comercialstr. 20, 7000 Chur, Switzerland
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Published Online: 2017-02-21 | DOI: https://doi.org/10.1515/rle-2016-0010

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.

Keywords: default rules; endowment effect; lotteries

JEL Classification: C91; K00; K12

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About the article

Published Online: 2017-02-21


This research is partly funded by the University of Hamburg and by the German Research Foundation under project Ni 1610/1-1.


Citation Information: Review of Law & Economics, ISSN (Online) 1555-5879, DOI: https://doi.org/10.1515/rle-2016-0010.

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