I have just read an interesting article arguing that property law should incorporate the endowment effect which although not undisputed seems to be empirically well founded. The article is `Current Empirical Premises to the Disclosure of the Secrets of Property in Law. A Foundation and a Guidline for Future Research´ by Geir Stenseth, and can be found here: http://www.anci.ch/doku.php?id=start
Geir goes through the empirical and theoretical work on the endowment effect. As becomes clear, the psychological foundations of the endowment effect are unclear. Recent findings suggest that there may be a genetic element (the effect can allegedly be found also in chimpanzees (!)). One explanation is that may be conducive to survival to spend more resources to fight for possessions than to try to acquire the possessions of others. Stenseth also discusses psychological explanations of investing oneself in the one's possessions. His point is that property law, e.g. the laws of expropriation (eminent domain) should reflect the empirical findings. He also notes that the endowment effect has importance for the use of property rules versus liability rules. If the endowment effect is substantial, that argues, of course, in favor of overcompensating (when comparing with market values) owners when expropriating their land or house.
In Denmark, local municipalities have recently expropriated land where no vital public interest was at stake, e.g. for the establishment of golf courses. A recent law proposal from the conservative-liberal (in the European sense) government requires this to be done through zoning regulations but does not constitute a fundamental break from the very free access of state authorities to expropriate private property. In Sweden, however, a new proposal suggests overcompensating owners (paying up to 125% of the market value).
An interesting example that research in the borderline between psychology, economics and law can inform public policy.
The issue also seems to me to have broader implications. The notion of entitlement is central to the recent paper by Hart and Moore on contracts as reference points. That appears to be connected to the endowment effect and to the theory of loss aversion that stresses the existence of a reference point from which losses are keenly felt.
I contacted Stenseth to suggest that he present his ideas at the EALE conference in Rome, which he is considering.