QUALIFICATIONS TO COASE

PART 1 ( BEHAVIOURAL ECONOMICS)

 THE ENDOWMENT EFFECT

• PEOPLE’S VALUATIONS FOR A GOOD INCREASE ONCE THEY OWN THAT GOOD
• BEFORE OWNING THE GOOD THEY VALUE IT LESS AND WILL PAY A RELATIVELY SMALL
AMOUNT TO ACQUIRE IT
• ONCE THEY HAVE IT THEIR MINIMAL ACCEPTABLE PRICE TO SELL THE GOOD RISES ABOVE THE
MAXIMUM THEY HAD BEEN WILLING TO PAY FOR IT.
• INHIBITS TRADE AS WTP IS LOW AND WTA IS HIGH.
• MUG EXPERIMENT (KAHNEMAN, KNETSCH & THALER)
 ENDOWMENT EFFECT CONTD

• HALF OF A GROUP WERE RANDOMLY GIVEN MUGS.

• THEORY PREDICTS THAT PEOPLE WHO ARE WILLING TO PAY MORE FOR MUGS WILL END UP
OWNING MUGS AFTER TRADE
• BUT PEOPLE WHO WOULDN’T PAY MUCH FOR A MUG BECAME UNWILLING TO SELL THEM
CHEAPLY ONCE THEY HAD MUGS.
• DIDN’T WORK FOR TOKENS WITH MONETARY VALUE. SO, NOT DUE TO TRANSACTION COSTS.
• CAN CAUSE COASE THEOREM TO FAIL EVEN WITH ZERO TRANSACTION COSTS.
 EFFECT ON COASE THEOREM AND EXPLANATIONS

• EXAMPLE WITH RIGHT TO PLAY MUSIC/RIGHT TO STUDY IN PEACE

• ACCORDING TO THE COASE THEOREM, IT WILL NOT MATTER WHO HAS THE RIGHT.
• BUT WITH THE ENDOWMENT EFFECT, THE ONE GIVEN THE RIGHT MAY START VALUING IT
MORE.
• THIS CAN CHANGE THE OUTCOME DEPENDING ON WHO HAS THE RIGHTS.
• ENDOWMENT EFFECTS MAY BE DUE TO (A) LOSS AVERSION, (B) STATUS QUO BIAS.
 LOSS AVERSION

• THE S-SHAPED VALUE CURVE.

• EXPERIMENTS.
• PEOPLE DISLIKED A LOSS AT LEAST TWICE AS MUCH AS THEY LIKED AN EQUIVALENT GAIN.
• EVOLUTIONARY BASIS WITH BIOLOGICAL SUBSISTENCE MINIMUM.
 ULTIMATUM GAMES AND UNFAIRNESS

• IN ULTIMATUM GAMES, A PROPOSER HAS A SUM OF MONEY.

• HE PROPOSES TO GIVE A PART OF THIS TO A RESPONDENT.
• IF THE RESPONDENT AGREES, THE MONEY IS DIVIDED AS SUGGESTED BY THE PROPOSER.
• IF THE RESPONDENT REFUSES, THEY BOTH GET ZERO.
• THEORY PREDICTS THAT RESPONDENTS SHOULD ACCEPT ANY OFFER ABOVE ZERO
• BUT ACTUALLY THEY REJECTED OFFERS SMALLER THAN 20-25% OF THE TOTAL AMOUNT.
• THEY DISLIKED UNFAIRNESS SO MUCH THAT THEY WERE WILLING TO GIVE UP SOMETHING TO
PUNISH AN “UNFAIR” PROPOSER.
 HOW DO EMOTIONS AFFECT THE COASE THEOREM?

• PEOPLE WERE EVEN WILLING TO FOREGO SOME GAINS TO PUNISH SOMEONE WHO HAD
BEEN “UNFAIR” TO SOMEONE ELSE.
• FEELINGS OF UNFAIRNESS AND ANGER ARE ADDITIONAL BARRIERS TO MAKING THE COASE
THEOREM WORK EVEN IF MONETARY TRANSACTION COSTS ARE ABSENT.
• ANGER MAY BE SPECIALLY STRONG BETWEEN PARTIES HEADING TO A LAWSUIT AND MAY
PREVENT THEM FROM MAKING MUTUALLY BENEFICIAL SETTLEMENTS.