Endowment Effect - Implications of The Endowment Effect

Implications of The Endowment Effect

Herbert Hovenkamp (1991) has argued that the presence of an endowment effect has significant implications for law and economics, particularly in regard to welfare economics. He argues that the presence of an endowment effect indicates that a person has no indifference curve (see however Hanemann, 1991) rendering the neoclassical tools of welfare analysis useless, concluding that courts should instead use WTA as a measure of value. Fischler (1995) however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation's infrastructure and economic growth.

The endowment effect has also been raised as a possible explanation for the lack of demand for reverse mortgage opportunities in the United States (contracts in which a home owner sells back his property to the bank in exchange for an annuity) (Huck, Kirchsteiger & Oechssler, 2005).

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