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Friday, December 13, 2013

Rumblings About Klass and Zeiler's Critique of the Endowment Effect

The UCLA Law Review recently published its first issue of Volume 61, which contains an article by Gregory Klass and Kathryn Zeiler entitled, Against Endowment Theory: Experimental Economics and Legal Scholarship.  Here is the abstract:

Endowment theory holds the mere ownership of a thing causes people to assign greater value to it than they otherwise would. The theory entered legal scholarship in the early 1990s and quickly eclipsed other accounts of how ownership affects valuation.  Today, one finds appeals to a generic “endowment effect” throughout the legal literature. Recent experimental results, however, suggest that the empirical evidence for endowment theory is weak at best. When the procedures used in laboratory experiments are altered to rule out alternative explanations, the “endowment effect” disappears. This and other recent evidence suggest that mere ownership does not affect willingness to trade or exchange. Many experimental economists no longer ascribe to endowment theory. Legal scholars, however, continue to rely on endowment theory to predict legal entitlements’ probable effects on expressed valuations. That reliance is no longer warranted. Endowment theory’s influence in legal scholarship provides important lessons about how legal scholars and policymakers should, and should not, use results from experimental economics.
Miriam Baer of PrawfsBlawg points out that the article "encapsulates quite succinctly the problems with relying on behavioral theories that have been successfully challenged or revised since their first introduction to legal scholars."  The Economist covers the earlier experiments by Charles Plott and Kathryn Zeiler that led to the conclusions discussed in the UCLA Law Review article.

In the PrawfsBlawg comments, Matt Bodie contends that the endowment theory has not been disproven and that Zeiler has a "conflict of interest" in speaking about social science research because she is one of the co-authors of the studies that the Klass and Zeiler article cites as disproving the endowment effect.

While it is difficult to know exactly what goes on in the minds of articles editors (I should know, since I am one -- and for the UCLA Law Review, no less!) I suspect that the articles editors of the UCLA Law Review were aware of Zeiler's co-authorship of the previous research, and did not find that a "conflict of interest" existed when she was stating a conclusion supported by previous studies that she had done.  Baer responds to Bodie's comment by pointing out that Zeiler is a law professor, and that it makes sense for her to re-iterate her social science findings in the context of legal scholarship.

I think that Baer makes a good point, and I will speculate that the UCLA Law Review's articles editors likely had the same consideration in mind.  They probably also thought that Klass and Zeiler's discussion of the endowment effect made a larger point about the danger of legal scholarship's tendency to miss developments in other disciplines -- and that these developments might have a substantial impact on foundational assumptions of legal theories.

For more criticism of Klass and Zeiler's argument, see Russell Korobkin's chapter, Wrestling with the Endowment Effect, or How to Do Law and Economics Without the Coase Theorem, which will appear in the Oxford Handbook of Behavioral Economics and the Law.

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