Experimental Tests of the Endowment Effect and the Coase Theorem

Experimental Tests of the Endowment Effect and the Coase Theorem

Paper Author 1, Paper Author 2. 1990. (View Paper → )

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 con-ducted. 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.

This paper proves the endowment effect: once people “own” something, their willingness to accept (sell) jumps far above willingness to pay (buy), so far fewer trades happen than you’d predict

For product builders, this means defaults and early “ownership” are potent levers: create accounts, libraries, and saved work up front to raise perceived value; expect strong resistance to taking features away (WTA > WTP), so migrations, plan changes, and churn saves need richer compensation than equivalent upsells.