Testing the Endowment Effect for Default Rules

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 willingnessto-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.

Using the endowment effect to explain managerial resistance towards codetermination: Implications for employment relations from the German case

“…The majority in both conditions recommended that the company 'stick' with the status quo, the existing default (Korobkin 1998:639). Marcin and Nicklisch (2014) replicated much of Korobkin's experiment, involving contrasts between full-liability and limited-liability default rules, but with better methodological design features. Significant 'offer-asking' gaps were consistently estimated (Marcin and Nicklisch, 2014:5,18).…”

“…In contrast, when parties stay with the default, as they usually do, the 'owning' party is not required to make concessions. So, in practice, default rules are not neutral (Marcin and Nicklisch 2014). Here, we review three empirical studies on the matter to help contextualise and explain the relationship between the endowment effect and different default situations.…”