• The endowment effect, loosely: you value stuff more when you own it than when you don’t.
• A standard way to “identify” endowment effects is to document a notable difference between the amount someone is willing-to-pay (WTP) to acquire an item and the amount that, if they already have the item, they would need to be paid to relinquish it (willingness-to-accept, WTA).
• A WTA that is substantially higher than the WTP is evidence for an endowment effect.
• A prospect theory-style explanation for endowment effects invokes loss aversion. Your reference point changes to include stuff you own, so to depart with owned stuff is coded in the loss domain.
• An alternative explanation for WTA/WTP gaps is that people bring their buying and selling selves into the lab with them. Strategically, in the real world it often makes sense for buyers to understate their WTP and sellers to overstate their WTA, and maybe those strategies survive in the lab, despite efforts to incentivize truthful responses.
• The authors invent the “Pay to Keep” condition. [Though for a parallel, see the “retention paradigm” of Gal and Rucker (2018).] There is no selling, only keeping, in this condition. If the amount you are willing-to-pay to keep (PTK) is similar to WTP (and hence typically less than WTA), the “endowment effect” can’t be due to loss aversion: unlike with WTP, the PTK condition involves a loss of something “owned,” but PTK is still below WTA. Any discrepancies (between PTK and WTA, and between WTP and WTA), then, might be consistent with subjects adopting buyer/seller roles.
• In testing the role of Pay to Keep, those who are offered the opportunity to pay to keep their item must believe that they already “own” the item, that it is part of their endowment.
• So, the experiments involve three conditions: WTP, WTA, and PTK. Subjects find a nice college-branded pen at their station when they enter the lab.
• In the WTA and PTK conditions, subjects are told that the pen is theirs, and they should use it to complete some boring task. In the WTP condition, the pen is just near the subject and they are told “no touchies;” they complete the boring task with a pencil instead.
• After the boring task, WTP folks are asked, want to buy the cool pen (and how much will you pay)?
• WTA folks are told they could sell their pen (how much would they need to be paid?) or just take it home.
• PTK folks are told, sadly, pay for the pen or lose it. How much are you willing to pony up?
• In the experiments, WTP and PTK are similar on average, and much less than WTA.
• So, there’s an endowment effect (WTA-WTP gap as well as WTA-PTK gap) – but no evidence for loss aversion, as the PTK folks think (?) that the pen is theirs, part of their endowment, even though they have to pay to keep it.
• People are not more interested in keeping the pen than in buying the pen: the valuation gaps can be due to buyer/seller discrepancies, though not to loss aversion.
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