Experimental Tests of the Endowment Effect and the Coase Theorem

TLDR

Contrary to theoretical expectations, willingness‑to‑accept measures greatly exceed willingness‑to‑pay measures. This paper reports experiments showing that the endowment effect persists even in market settings with opportunities to learn. Consumption objects such as coffee mugs were randomly allocated to half the subjects, and markets for the mugs were then conducted. Observed trade volume for mugs was significantly below the Coase theorem prediction, whereas markets for induced‑value tokens matched predictions, indicating that transaction costs do not explain undertrading of consumption goods.

Abstract

Contrary to theoretical expectations, measures of willingness to accept greatly exceed measures of willingness to pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods.