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date: 19 June 2021

Abstract and Keywords

Contrary to a traditional assumption of law and economics that underlies the Coase Theorem, a substantial amount of empirical evidence demonstrates that, at least in some situations, people value entitlements more when they are endowed with them than when they are not. This chapter describes this phenomenon, knows as 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. It then examines 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. The chapter shows that, used cautiously and judiciously, evidence of the endowment effect can sharpen legal policy analysis, but also that this enterprise is complicated and fraught with peril.

Keywords: endowment effect, status quo bias, offer-asking gap, WTA-WTP gap, loss aversion, Coase Theorem, query theory

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