Testing the initial endowment effect in experimental auctions

Abstract

In experimental auctions, participants are usually given an initial endowment or cash compensation that will cover the costs associated with their bids in the experiment as well as their participation time. This study analyses participants' bids in a randomly binding second-price auction to test the effect of the initial endowment on participants' willingness-to-pay estimates. Three different endowments: $2, $4, and $6 are used to compensate participants in an experimental auction. It is found that participants receiving $4 or $6 as an initial endowment, bid statistically higher than those receiving only $2. Thus, willingness-to-pay estimates are sensitive to the initial endowment. Based on the results obtained in this experiment, it is concluded that endowments that are closer to the value of the auctioned good may be a more appropriate way to compensate auction participants in order to reveal their true willingness to pay for a private good, and to reduce overbidding. Additionally, the findings illustrate that an initial compensation closer to the participants' value of time may inflate their bids, and consequently may not be a correct compensation mechanism to elicit true willingness-to-pay for private goods. New ways of compensating participants in experimental auctions should be investigated.

Radio Messaging Frequency, Information Framing, and Consumer Willingness to Pay for Biofortified Iron Beans: Evidence from Revealed Preference Elicitation in Rural Rwanda

“…This is similar to Oparinde et al (2014), who found a 24% increase in WTP due to a nonpayment effect. The present study and Oparinde et al (2014) have demonstrated that it is feasible to conduct revealed preference-elicitation experiments in African countries in an out-of-pocket payment context, while avoiding the cash-in-hand effect bias introduced by participation fees, as noted in previous studies (Loureiro et al 2003;Corrigan and Rousu 2006;Morawetz et al 2011).…”

Experimental auctions, collective induction and choice shift: willingness-to-pay for rice quality in Senegal

“…The latter pretext is commonly used in Africa to detach pecuniary endowments from their 'gift' or 'payment-for-service' context. It elegantly avoids the fee being seen as a quid pro quo for which participants should reciprocate (Lusk and Shogren, 2007), and which may bias the bids (Loureiro, Umberger, and Hine, 2003).…”

Methods matter: a meta‐regression on the determinants of willingness‐to‐pay studies on biofortified foods

“…For example, in dispersed rural populations, BDM is sometimes preferred over other auction mechanisms, as it allows for eliciting valuations from individuals (home-use testing) and because carrying out group auctions (central-location testing) can be expensive and time-consuming. 39 Another reason is that laboratory auctions may require higher participant fees, which have shown to positively affect valuations, [40][41][42] a phenomenon known as an income endowment effect. 43 Such monetary incentives may be of particular relevance when considering students rather than adults, 44 despite the fact that both types of respondents, commonly targeted in WTP research, are not expected to bid significantly differently.…”