Friday, February 6, 2009

The endowment effect and expropriation

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:
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.


  1. I do not understand why one needs the endowment effect to justify "overcompensating", that is paying more than market values in cases of expropriation. The market economy rests on the assumption that different people have different valuations (whereas the endowment effect means a different valuation by the same person depending on owning something or not), otherwise there would be no meaningful trading. I only buy something if I value it higher as the price (and someone sells it behause she values it lower than the price). That means that all owners that keep their belongings have a higher valuation than the market price, otherwise they would be selling.

  2. True enough, Prof. Dilger, but the endowment effect and its psychological causes lead one to emphasize the need for extra compensation more strongly. The idea is that research into the endowment effect can make one more sensitive to the emotional costs of expropriation.

  3. Hi,
    I agreed with Alexander Dilger.Your blog is nice.
    I appreciate the skills of your blog writing and the time sharing with us.he Endowment Effect is the preference for stability over change.